Fixed costs

Definition

Fixed costs are expenses that remain constant regardless of the level of production or sales volume. They must be paid even if no products are produced or sold.

5 Must Know Facts For Your Next Test

1. Fixed costs do not change with the level of output in the short term.
2. Examples include rent, salaries, and insurance premiums.
3. They are a key component in calculating the break-even point.
4. Fixed costs are spread over all units produced, reducing per-unit cost as production increases.
5. In Cost-Volume-Profit analysis, fixed costs help determine how changes in sales affect overall profitability.

Review Questions

• What are some common examples of fixed costs?
• How do fixed costs impact the calculation of the break-even point?
• Why do fixed costs decrease on a per-unit basis as production increases?

Related terms

Variable Costs:

Expenses that vary directly with the level of production or sales volume.

Contribution Margin:

The amount remaining from sales revenue after variable expenses have been deducted.

Break-Even Point:

The level of sales at which total revenues equal total costs, resulting in zero profit.