What are fixed costs?

• A. Costs that are not affected by the levels of business carried out
• B. Costs that vary with production
• C. Costs that are not relevant to profitability
• D. Costs that are completely avoidable

Answer: (A)

Fixed costs are costs that stay the same regardless of how much you produce or sell, within a normal operating range. They don’t change with output, so they persist even if production is zero. Examples include rent, salaries of permanent staff, insurance, and depreciation. This is in contrast to variable costs, which rise or fall directly with production volume, like raw materials or direct labor used per unit.

Because fixed costs don’t move with output, they influence how many units you must sell to break even and achieve profitability. Some fixed costs can be avoided if you dramatically scale back or shut down, but in the short term many fixed costs remain unavoidable.