What is a fixed cost?

A fixed cost is a cost that does not vary in the short term, irrespective of changes in production or sales levels. Examples of fixed costs are:

  • Amortization
  • Depreciation
  • Insurance
  • Interest expense
  • Property taxes
  • Rent

Over the long term, few (if any) costs are truly fixed. For example, a thirty-year lease can be eliminated after the thirtieth year, so the expense is actually variable if viewed over a 31-year time period.

Companies with a high proportion of fixed costs have a high breakeven point, above which they earn outsized profits. Companies with a low proportion of fixed costs have a low breakeven point, above which they earn more modest profits.

Companies with high fixed costs have a greater incentive to engage in price wars to gain some additional incremental revenue, because they can recognize the bulk of these additional revenues as profit.