Fixed Cost

AAA

DEFINITION of 'Fixed Cost'

A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses that have to be paid by a company, independent of any business activity. It is one of the two components of the total cost of a good or service, along with variable cost.

INVESTOPEDIA EXPLAINS 'Fixed Cost'

An example of a fixed cost would be a company's lease on a building. If a company has to pay $10,000 each month to cover the cost of the lease but does not manufacture anything during the month, the lease payment is still due in full.

In economics, a business can achieve economies of scale when it produces enough goods to spread fixed costs. For example, the $100,000 lease spread out over 100,000 widgets means that each widget carries with it $1 in fixed costs. If the company produces 200,000 widgets, the fixed cost per unit drops to 50 cents.

VIDEO

Loading the player...
RELATED TERMS
  1. Applied Overhead

    A type of overhead that is recorded under the cost-accounting ...
  2. Operating Leverage

    A measurement of the degree to which a firm or project incurs ...
  3. Semi-Variable Cost

    A cost composed of a mixture of fixed and variable components. ...
  4. Operating Margin

    A ratio used to measure a company's pricing strategy and operating ...
  5. Operating Expense

    A category of expenditure that a business incurs as a result ...
  6. Outlay Cost

    Any concrete business expenses that can be identified in the ...
RELATED FAQS
  1. Are marginal costs fixed or variable costs?

    Marginal costs are a function of both fixed and variable costs. Fixed costs of production are considered the costs that occur ... Read Full Answer >>
Related Articles
  1. Investing

    What are Fixed Costs?

    Fixed costs are business expenses that do not change as the level of production goes up or down. They are one of two types of business expense, the other being variable costs. Variable costs ...
  2. Investing Basics

    Reading The Balance Sheet

    Learn about the components of the statement of financial position and how they relate to each other.
  3. Markets

    What Is A Cash Flow Statement?

    Learn how the CFS relates to the balance sheet and income statement as a part of a company's financial reports.
  4. Personal Finance

    Microeconomics

    This tutorial teaches the basics of one of the most important economic topics. A must for all investors.
  5. Investing

    Operating Leverage Captures Relationships

    Find out how fixed and variable costs interact to shed new light on old companies.
  6. Budgeting

    How Budgeting Works For Companies

    Learn how to break down and understand a corporate budget.
  7. Options & Futures

    Advanced Financial Statement Analysis

    Learn what it means to do your homework on a company's performance and reporting practices before investing.
  8. Markets

    Introduction To Fundamental Analysis

    Learn this easy-to-understand technique of analyzing a company's financial statements and reports.
  9. Economics

    Higher Oil Prices On the Horizon? Maybe Not.

    Despite a decision by some oil companies to reduce the overall supply of oil, a sustained ascent in oil prices might not be on the immediate horizon.
  10. Personal Finance

    What Drives Consumer Demand for Tesla?

    Tesla did not invent the electric vehicle market, but it has brought to it elements of luxury and elite status. But what really drives demand for Teslas?

You May Also Like

Hot Definitions
  1. Fixed-Charge Coverage Ratio

    A ratio that indicates a firm's ability to satisfy fixed financing expenses, such as interest and leases. It is calculated ...
  2. Efficiency Ratio

    Ratios that are typically used to analyze how well a company uses its assets and liabilities internally. Efficiency Ratios ...
  3. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  4. Subsidy

    A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy ...
  5. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business ...
  6. Technical Skills

    1. The knowledge and abilities needed to accomplish mathematical, engineering, scientific or computer-related duties, as ...
Trading Center