Fixed Costs
Business expenses that remain constant regardless of production or sales volume.
Definition
Fixed costs are expenses that don't change with sales or production volume—at least within a relevant range. Common fixed costs include rent, salaries, insurance, and loan payments. Whether you sell 10 units or 10,000, these costs remain the same.
Fixed costs contrast with variable costs, which change with volume. Understanding the mix of fixed and variable costs is crucial for break-even analysis, pricing decisions, and understanding how profits change with sales volume.
Why It Matters
High fixed costs mean you need more sales volume to break even, but once you pass break-even, profits grow quickly because additional sales don't add proportional costs. Low fixed costs make break-even easier but may limit scale.
This relationship affects pricing and sales strategy. Businesses with high fixed costs often need volume strategies; those with high variable costs can be profitable at lower volumes.
Examples
- 1
A software company's primary costs are developer salaries (fixed). Once they break even, each additional subscription is nearly pure profit.
- 2
Office rent is $5,000/month whether revenue is $50,000 or $100,000. It's a fixed cost.
- 3
A manufacturer analyzes fixed vs. variable costs to understand that they need $200,000 monthly revenue to cover fixed costs before making profit.
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