Fixed costs stay the same regardless of how much you produce — rent, salaries, insurance. Variable costs change with output. Understanding the split is essential for pricing and break-even. Here is the explanation.
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What Fixed Costs Are
Costs that do not change with sales volume in the short term: rent, insurance, admin salaries, software subscriptions. Even with zero sales you still pay them.
Fixed vs Variable
- Fixed: constant (rent, salaries).
- Variable: scale with output (materials, shipping, per-sale fees).
Why It Matters
- Break-even: you need enough contribution margin to cover fixed costs.
- Risk: high fixed costs are risky in quiet periods.
- Leverage: with high fixed costs, more sales flow heavily to profit.
FAQ
Are salaries fixed or variable?
Base salaries are usually fixed; commission and bonuses are variable.
How do fixed costs affect pricing?
You must price above variable cost and cover fixed costs across total volume.
Related: Business Income Statement and Economies of Scale.