Fixed Costs

Fixed costs refer to business expenses that remain constant over a specified period, regardless of changes in activity levels.

They usually include rent, insurance, property taxes, and salaries of permanent staff.

Consider Expedition Pro, an outdoor adventure company that offers guided hiking and camping experiences.

It rents a small building to store its hiking and camping gear and pays five hundred dollars per month in rent.

Whether the company serves fifty customers or two hundred customers, the rent stays the same.

The first key feature of fixed costs is that they remain constant within the relevant range of activity.

Another feature is that as activity increases, the average fixed cost per customer decreases.

If Expedition Pro serves fifty customers, the rent equals ten dollars per customer.

At two hundred customers, it drops to two dollars and fifty cents per customer.

While the total fixed cost remains constant, the cost per unit decreases as the level of activity increases.

To sum it up, fixed costs are the expenses a business must pay to stay in operation even when it is not producing or providing services.