DEFINITION of 'Capacity Cost'

A fixed expense incurred by a company or organization in order to provide for or increase its ability to conduct business operations. Capacity costs generally do not vary with production levels and can be reduced or avoided only by shutting down business locations or outsourcing.

BREAKING DOWN 'Capacity Cost'

Typical examples of capacity costs are items such as rent or lease payments, depreciation on equipment or machinery, property taxes, insurance and basic utilities such as heating. These types of expenses must be incurred in order to provide a functional office or business location where a company can conduct operations and are incurred regardless of how much (or how little) business is actually conducted.

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