Fixed Costs
Expenses that remain constant regardless of production or sales volume within a relevant range, such as rent, insurance, and salaried personnel.
Fixed Costs
Expenses that remain constant regardless of production or sales volume within a relevant range of activity, requiring payment even if no business activity occurs.
For example, a manufacturing company might have monthly fixed costs of $100,000, including $50,000 in factory rent, $30,000 in equipment leases, and $20,000 in administrative salaries, which must be paid whether production volume is zero or at full capacity.
Fixed costs affect break-even points, leverage, and risk levels. Higher fixed costs create greater operating leverage, magnifying both potential profits and losses as volume changes. While fixed in total, these costs decrease per unit as volume increases, creating economies of scale. Beyond the relevant range of activity, fixed costs may change in steps (step-fixed costs), as when additional facilities or supervisors become necessary at higher volumes.