Regardless of the number of units produced, fixed costs are the costs associated with a product's production.If your business produces curtains, your fixed cost list will include things like the building lease, sewing machines, storage bins, overhead lighting fixture and sewing chairs.The average fixed cost is how much it costs to produce a unit of product.Depending on the type of information you are working with, there are two methods for calculating the AFC.Follow the instructions to work out the average fixed cost.
Step 1: To measure, you have to choose a time period.
A distinct time period is what you want for your calculation.This will help you calculate a fixed cost for your production.It's easiest to use one month or a number of months because you can easily determine fixed costs.You can use the amount of time it takes to produce a certain number of units.You could use the time constraint to figure out your fixed costs if you produce 10,000 units every two months.
Step 2: Add the total fixed costs.
Fixed costs are the costs that don't change based on how many products you produce.The rent on the building used to produce or sell the good, the cost of buying or maintaining manufacturing equipment, property taxes, and insurance are all included.The cost of payroll for employees not directly involved in the manufacturing process can be included.Determine total fixed costs by summing these costs.Manufacturing 10,000 units in two months will cost you $4,000 per month in rent, property taxes, insurance, and non-manufacturing wages.In fixed expenses, this would be $11,000 per month.If you double this number, you will get $22,000 in total fixed costs.See how to calculate the fixed cost.Variable costs, or costs incurred based upon how many products you produce, are not included in this.Material used in production, utilities, labor costs, and packaging expenses are some of the variable costs.
Step 3: Determine the number of units produced.
Simply use your figures for the goods you are measuring.You need to make sure the production time period matches the time you collected the information for fixed cost expenses.10,000 units were produced in the two months we are measuring.
Step 4: Divide the fixed costs by the number of units produced.
The average fixed cost is given.To complete our example, we would divide the $22,000 in total fixed cost over our two month period by the 10,000 units produced.The fixed cost is $2.20 per unit.
Step 5: The total cost can be calculated.
The total amount of money it costs to produce a product is the same as the total fixed cost and total variable cost.The total cost includes labor, commissions, utilities, marketing, administrative costs, office supplies, shipping and handling, materials, interest, and any other cost that relates to the specific product.The total fixed cost and total variable cost is the sum.
Step 6: The average total cost is known as the ATC.
The ATC is the total cost divided by the number of units.The ATC will be $3.50 per unit if the total cost is $35,000 over the two months when 10,000 units are produced.
Step 7: Determine the total cost amount.
As production increases and decreases, variable costs change as well.Manufacturing labor and materials are two of the most variable costs.Electricity and gas used in manufacturing are examples of utilities that vary with production.The total variable cost is made up of $2,000 in materials, $3,000 in utilities, and $10,000 in manufacturing wages.You can get a total variable cost of $15,000 with these numbers.You can see how to calculate variable costs.
Step 8: Divide the total variable costs by the number of units produced to get the average variable cost.
When 10,000 units are produced, the total variable cost would be $15,000.
Step 9: Find the average fixed cost.
The average total cost is subtracted from the average variable cost.The average fixed cost will be the answer.The average variable cost would be subtracted from the average total cost in order to reach an average fixed cost amount of $2 per unit.This matches the average fixed cost calculated in method 1.
Step 10: Product profitability can be checked by using the AFC.
Understanding your product's potential profitability can be helped by calculating a realistic AFC.Before starting a new project, try to do a break-even analysis to better understand how the price and costs affect the project's profitability.The most important thing is that your product's price is always above the average variable cost.Fixed costs are covered by the excess.It's easy to be misled into thinking that producing as much product as possible while maintaining total fixed costs is a way to profitability.
Step 11: Expenses can be analyzed with theAFC.
Average fixed costs can be used to determine where to cut expenses.Cutting expenses can be used to increase profitability or due to market conditions.If fixed costs make up a large part of your total cost, it may be a good idea to consider where you can cut back.It is possible to cut down on electricity usage with more efficient lighting or manufacturing equipment.It would be possible to see how this change would affect your profit per product.More benefits from greater production numbers are provided by reducing fixed costs.The sales needed to reach your break-even point will be lowered by doing this.
Step 12: AFC can be used to realize economies of scale.
Economies of scale come from large amounts of production.By producing more, you can lower your fixed cost per item and increase your profit margin.You can price out how much more profitable you could be by increasing your production.If you compare this to the price of reaching this level of production, you can determine whether or not an expansion would be profitable.