What is Fixed Cost?
Fixed costs are expenses that stay the same no matter how much the business sells. These are regular costs the business must pay and they are not affected by how much the business produces.Common fixed business costs include:
- Rent/lease payments or mortgage
- Equipment lease payment
- Car lease payment
- Utility payments
- Phone service
- Business insurance
All business expenses can be divided into two types of costs: fixed and variable.
A constant figure
Fixed costs are relatively constant—they don’t change, or vary, much.
Your electric bill, for example, might increase a little during warmer months due to increased air conditioning usage, but, month to month, there should be little change.
How to calculate total fixed costs
To determine an organization’s total fixed costs, simply add all of the fixed costs together. Total fixed costs are the sum of all individual fixed costs.
Impact on profitability
Some types of businesses have high fixed costs, such as a commercial printing operation, which may have large equipment costs and space requirements The cost to acquire the machinery and the space generates high monthly payments—no matter how many printing jobs the business has.
However, once those fixed costs are recouped and the company reaches its break-even point, the costs associated with production are generally quite low. From then on, it's fairly easy to generate profits since the variable costs—the expenses associated with product manufacturing—are lower.
At the other end of the cost spectrum, companies with low fixed costs, such as graphic designers or merchandising consultants, have higher variable costs. It doesn’t take much revenue for such service businesses to break-even, but the amount of profit generated after that point generally remains about the same.
Profits don’t skyrocket after all the fixed costs are covered, as they do with high-fixed-cost ventures.
In general, keeping fixed costs low is a smart financial strategy.