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The concept of fixed costs is crucial to consider since it is one of the two main components of the overall production expense, the other being the variable cost. Fundamentally, fixed costs are seen as the sort of fee that, regardless of the company’s level of economic performance, rarely varies. In particular, if you can calculate the average fixed cost, you will be able to determine the fixed cost per unit.
What is a fixed cost?
Your first step in calculating the total fixed cost is listing all of your fixed expenses. The average fixed cost is calculated by dividing the total fixed cost by the number of goods or services a business produces. The term “fixed cost” refers to the incurred expense that does not change with the change in the production level or sales volume over a certain period of time.
In the absence of any fixed costs, the profit would fall and rise in line with Sales Revenues. The ‘fixed’ aspect doesn’t mean they never change or cannot be managed. Rather, a fixed cost is a cost that cannot easily be reduced in the short-term, and will continue to exist even when no goods or services are being produced. Therefore, the fixed cost of production for PQR Ltd for the month of May 2019 is $73,333.33. Therefore, the fixed cost of production for the company during the year was $25,000.
Formula to calculate Average Fixed Cost.
Average fixed costs are the total fixed costs paid by a company, divided by the number of units of product the company is currently making. In business, the term “variable costs” refers to those expenses that change concerning the amount of goods or services produced. Variable costs increase or decrease as production increases or decreases.
