Image:CVP-TC-FC-VC.svg
Image:CVP-TC-FC-VC.svg

Fixed Costs are expenses which business must pay that are not dependent on how much the business produces or what the costs of their products are. This means that regardless of how much of a product a business is able to or decides to produce, whether this number is 0 or 100 they will still have to pay the fixed cost(s). Examples include rents or salaries, costs which are fixed because they represent a stable fee which must be payed no matter what.

Fixed Costs are often time-related in the sense that they must be paid per week or per month (such as in the examples above). This contrasts with Variable Costs, which are costs that change based on the volume produced by the business. Fixed Costs are also a component of of Total Costs, which is comprised of Fixed plus Variable costs, as demonstrated in the graph above. While variable costs change, fixed costs do not.

Links!
wikipedia
not wikipedia (but still useful)
another good definition of fixed cost with analysis and example

Practice Question:
T/F - Fixed costs will change based on the number of units of a good that a business decides to produce.

Answer: False (if you didn't get that, then you should probably go back to the top of the page and do some rereading. Now).


Here's a helpful video!

You can think about the fixed cost as being like the bread in the peanut butter and jelly sandwich to which Brian is referring in his stunning rendition of this famous song. It is fixed regardless of what kind of sandwich you make (because all sandwiches need bread to even be sandwiches, right?), whereas the things you decide to include in your sandwich might change, or be variable.