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Fixed Costs

General

Fixed Costs

Expenses that stay constant regardless of production or sales volume, like rent or salaried wages, as opposed to variable costs that scale with output.

Definition

Fixed costs are expenses that stay the same regardless of how much a business produces or sells in a given period. Rent, insurance premiums, salaried wages, and loan payments are typical examples, they show up on the books whether you sell zero units or ten thousand.

This is the counterpart to variable costs, which scale directly with volume. The distinction matters most for break-even analysis, since fixed costs represent the baseline a business has to cover through its contribution margin before any profit begins.

Formula

Break-Even Units = Total Fixed Costs / Contribution Margin per Unit

Worked Example

A business has $50,000 in monthly fixed costs (rent, salaries, insurance) and a contribution margin of $25 per unit sold.

  • Break-even units: $50,000 / $25 = 2,000 units

Selling fewer than 2,000 units in a month means fixed costs aren't fully covered; every unit beyond that contributes directly to profit.

Key Things to Know

  • Fixed costs don't disappear at zero sales. They're incurred regardless of activity level, which is what makes them the baseline in break-even math.
  • They can still change over longer time horizons. A fixed cost is fixed within a given period, not permanently, rent renewals and new hires shift the baseline going forward.
  • High fixed costs raise the stakes of low sales periods. A business with a heavy fixed cost base needs consistent volume to stay above break-even, making it more vulnerable to demand swings.
  • Reducing fixed costs lowers your break-even point immediately. Cutting overhead has a direct, one-time effect on how many units you need to sell to turn a profit.
  • Fixed costs are distinct from sunk costs. Fixed costs recur each period and are relevant to future decisions, sunk costs are one-time and already spent, irrelevant to what you decide next.

Related Calculators

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Related Terms

Variable CostsVariable CostsContribution MarginContribution Margin

Frequently Asked Questions

Do fixed costs ever change?
They can change over time, a rent renewal or a new hire raises the fixed cost baseline, but they don't change with how much you sell in a given period. That's the key distinction from [variable costs](/glossary/variable-costs/), which move with volume.
Are salaries always a fixed cost?
Salaried employee wages are typically fixed, since they're paid regardless of output. Hourly or commission-based pay tied to production or sales volume behaves more like a variable cost instead.
Why do fixed costs matter for break-even analysis?
Break-even volume is calculated by dividing total fixed costs by the contribution margin per unit, so higher fixed costs directly raise how many units you need to sell before turning a profit.
Can a business reduce its fixed costs?
Yes, through actions like renegotiating a lease, moving to remote work, or switching from salaried staff to contractors, though these changes usually require a longer-term decision rather than a quick monthly adjustment.
Is depreciation a fixed cost?
Generally yes, since depreciation on equipment or property is recorded on a schedule independent of how much is produced in a given period, unlike a cost tied directly to units made or sold.