Fixed Costs

Business

WHAT IS IT?

Fixed costs are costs that do not usually change directly with the amount of sales over a particular period.

IN PLAIN ENGLISH

They are regular costs that generally need paying even when sales change.

SIMPLE EXAMPLE

Rent, some insurance costs and certain subscriptions may be treated as fixed costs for a particular calculation, although real businesses can have costs that change over time.

WHY DOES IT MATTER

Understanding fixed costs helps you calculate break-even and see how much sales volume is needed to cover them.

THE ROCKET TEST

Fixed costs generally stay the same as sales change within the period being considered.