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Definition

Fixed costs

Fixed costs refer to costs that do not vary with production or sales level and include costs such as rent, interest, depreciation, and clerical and management salaries. Regardless of the level of output, the company must pay these costs. Whereas total fixed costs remain constant as output increases, the fixed cost per unit (or average fixed cost) will decrease as output increases because the total fixed costs are spread across more units of output.

Fixed costs are the costs that a company incurs in operating a business whether it sells something or not. It remains the same in total regardless of changes in the activity level. For example, it may cost a company $10,000 per month to air-condition its factory, the air-conditioning cost is fixed; cooling the factory will cost the same whether the company produces 10 or 10000 units per month.


Fixed costs are costs that remain constant regardless of the number of units produced.

 

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