A fixed cost is any cost that will remain the same, regardless of changes in your sales volume.
For example, suppose you own a candy store. Your fixed costs would include:
- rent
- utilities (electric and gas)
- employee salaries
- maintenance
because each of these costs would remain the same regardless of how much (or how little) candy you sell.
Fixed costs only remain the same over what we call a relevant range. Within a certain range of sales, costs remain fixed. However, if sales go too high or low, then your fixed costs will change. For example, suppose your sales are so high that you need to hire another employee. Then, once you have been pushed outside your relevant range, your fixed costs will increase.
Fixed costs do not change in the short-term. However, they can be changed in the long-term. You can sign a new lease, purchase energy-saving equipment, or hire more employees, thus changing your fixed costs over time.
[Image Sweetness by papalars, on Flickr]
Trackbacks/Pingbacks
[…] already written about fixed and variable costs. Now let me warn you: profit or net income is a great way to measure your […]
[…] and planning your sales volume. Over the past few posts, I’ve explained how to determine fixed costs, variable costs, and contribution margin. If you haven’t already done so, I encourage you […]
[…] run a business, you must understand how your business’s costs behave. A fixed cost is any cost that will remain the same, regardless of changes in your sales volume. Variable […]
[…] flexibility into your business is to minimize fixed costs and overhead. First of all, what are fixed costs? A fixed cost is any cost that will remain the same, regardless of changes in your sales volume. […]
[…] the real world, companies (and house flippers) must pay fixed costs, which usually increase with the amount of property that you own. No matter how much or how […]