Calculate the fixed cost allocated to each unit of production.
Fixed costs remain constant regardless of production volume: rent, salaries, insurance, equipment leases. Average fixed cost (AFC) decreases as you produce more units — this is the basis of economies of scale.
A bakery with $100,000 in annual fixed costs: At 5,000 loaves, AFC = $20/loaf. At 10,000 loaves, AFC drops to $10/loaf. At 50,000 loaves, AFC is only $2/loaf. The variable cost stays the same, but the fixed cost burden per unit shrinks.
| Units | AFC | AVC | ATC |
|---|---|---|---|
| 1,000 | $100.00 | $15.00 | $115.00 |
| 5,000 | $20.00 | $15.00 | $35.00 |
| 10,000 | $10.00 | $15.00 | $25.00 |
| 50,000 | $2.00 | $15.00 | $17.00 |