Imagine a cement factory that uses a machine worth Rs 10 crore. If the machine has a life of 5 years, it costs the cement company Rs 2 crore annually, to run it. Now, imagine that the machine can churn out 10,000 bags of cement per year, but because there isn’t enough demand, the company produces only 5,000 bags. At full capacity, the average machine-cost would have worked out to Rs 2,000 per bag. But, at 50 percent capacity utilization, the average fixed cost works out to Rs 4,000 per bag.