Fixed cost

Definition

A fixed cost is a cost that does not change with activity/output within a relevant range and time period (e.g., monthly factory rent, salaried supervisor pay).

Facts (core points)

1. Total fixed cost is constant within the relevant range; fixed cost per unit falls as volume rises.
2. Typical subtypes: Committed (long-term, hard to change: depreciation, lease) vs Discretionary (period/managed: training, advertising budgets).
3. Related terms: Step-fixed (jumps at capacity thresholds), mixed/semi-variable (has both fixed and variable parts).

Elaboration

• Why it matters: Drives operating leverage and break-even; high fixed costs mean profits are sensitive to sales volume.

• In CVP analysis: 

Break-even units = Fixed Costs ÷ (Selling Price − Variable Cost per unit).

• Relevant range: “Fixed” holds only between certain capacity levels and for a specified time; outside that, costs can step up/down (e.g., renting an extra warehouse).

• Planning & control: Treat committed fixed costs as capacity decisions; review discretionary fixed costs during budgeting (zero-based or activity-based reviews).

Examples (by context)

Context	Fixed Cost (Total)	Notes
Factory	Building rent, supervisor salaries, plant depreciation	Unchanged by units produced (within range)
Retail store	Shop lease, security contract, store manager salary	Not tied to sales volume day-to-day
Hotel	Property tax, insurance, front-office salaried staff	Occupancy affects revenue, not these costs
University	Campus lease, permanent staff salaries (portion), library subscriptions	Student numbers affect variable items, not these
Software/SaaS	Server base subscription, office lease, core engineering salaries	Variable cloud costs may scale; base is fixed
Logistics	Fleet insurance, depot lease, salaried dispatchers	Fuel is variable; lease is fixed
Archery club	Field rental, equipment depreciation, head coach retainer	Arrows/targets used are variable

Tiny numeric illustration

• Monthly fixed factory overhead = RM50,000.
• Produce 10,000 units → fixed cost per unit = RM5.00.

• Produce 20,000 units → fixed cost per unit = RM2.50.

Total is unchanged (RM50,000), but per-unit fixed cost halves when volume doubles.

Quick checklist (exam tips)

1. State the relevant range & period.
2. Distinguish total fixed vs per-unit fixed behavior.
3. Classify as committed vs discretionary (and note step-fixed if capacity shifts).
4. Use in CVP/break-even with clarity on contribution margin.