Fixed cost
Fixed cost is a cost whose total remains constant regardless of output volume, within a defined range of activity. Factory rent and annual salary contracts are typical examples.
Also known asfixed costs
See it move
The cost-behaviour chart plots volume in units on the horizontal axis and total cost in euros on the vertical axis, showing a horizontal line that does not rise as output increases. The caption illustrates the point with a €24,000 annual lease: at 6,000 units the per-unit fixed-cost charge is €4, and at 12,000 units it falls to €2, yet the total lease cost remains unchanged at €24,000 throughout.
The formula
Variables
- Total fixed cost for the period — constant within the relevant range (€)
- Units produced
Per-unit fixed cost declines as Q rises; the total TFC is unchanged by volume
Check yourself
A manufacturer pays €36,000 per year for factory insurance regardless of how many units are produced. Which statement correctly describes the behaviour of this cost when production doubles from 3,000 to 6,000 units within the relevant range?