Short definition: A fixed cost is a cost that remains constant regardless of the level of production or sales activity.
Explanation: These costs are incurred even if a company produces or sells nothing. They are typically associated with the company’s infrastructure and capacity, and can include expenses such as rent, salaries, insurance, and depreciation.
Example: A manufacturing company might have fixed costs such as rent for its factory building, salaries for its administrative staff, and depreciation on its machinery. These costs remain the same whether the company produces 100 units or 1,000 units.
Additional information (optional): Fixed costs are an important consideration for businesses, as they represent a baseline level of expenses that must be covered regardless of sales volume. Understanding fixed costs is crucial for determining a company’s break-even point and making informed pricing and production decisions.