AFC is the total fixed costs of production divided by the quantity of output. Fixed costs are expenses that do not vary with the level of production, such as rent, insurance, and administrative expenses. Here's how AFC works:

• A company has fixed costs of $1,000 per month for a factory.
• If the company produces 1,000 units in a month, the AFC would be $1 per unit ($1,000 fixed costs / 1,000 units produced).
• If the company increases production to 2,000 units, the AFC would decrease to $0.50 per unit ($1,000 fixed costs / 2,000 units produced).