What is a fixed cost?

• A. A cost that changes with sales
• B. A cost that is always variable
• C. A cost that does not vary based on the business's earnings
• D. A cost that can be avoided in the short term

Answer: (C)

Fixed costs stay the same regardless of how much the business produces or earns in the short term. They don’t change with sales or profits, which is why a rent payment, a manager’s salary, or depreciation on equipment are classic examples. These costs must be paid even if there’s little or no output, so they don’t vary with earnings.

In contrast, costs that do change with output are variable costs—like raw materials or sales commissions. Some costs are mixed, containing both fixed and variable parts, but the defining feature of a fixed cost is its consistency despite different levels of activity. That’s why the statement describing a cost that does not vary based on the business’s earnings best captures what a fixed cost means.