Fixed Cost Examples

A fixed cost is a cost that does not change over the short-term, even if a business experiences
changes in its sales volume or other activity levels. This type of cost tends to instead be
associated with a period of time, such as a rent payment in exchange for a month of occupancy,
or a salary payment in exchange for two weeks of services by an employee. It is of some
importance to understand the extent and nature of the fixed costs in a business, since a high
fixed-cost level requires a business to maintain a high revenue level in order to avoid generating
losses. Here are several examples of fixed costs:
 Amortization. This is the gradual charging to expense of the cost of an intangible asset
(such as a purchased patent) over the useful life of the asset.
 Depreciation. This is the gradual charging to expense of the cost of a tangible asset
(such as production equipment) over the useful life of the asset.
 Insurance. This is a periodic charge under an insurance contract.
 Interest expense. This is the cost of funds loaned to a business by a lender. This is only a
fixed cost if a fixed interest rate was incorporated into the loan agreement.
 Property taxes. This is a tax charged to a business by the local government, which is
based on the cost of its assets.
 Rent. This is a periodic charge for the use of real estate owned by a landlord.
 Salaries. This is a fixed compensation amount paid to employees, irrespective of their
hours worked.
 Utilities. This is the cost of electricity, gas, phones, and so forth. This cost has a variable
element, but is largely fixed

How to use a break-even analysis

A break-even analysis allows you to determine your break-even point. But this isn’t the end of
your calculations. Once you crunch the numbers, you might find that you have to sell a lot more
products than you realized to break even.
At this point, you need to ask yourself whether your current plan is realistic, or whether you need
to raise prices, find a way to cut costs, or both. You should also consider whether your products
will be successful in the market. Just because the break-even analysis determines the number of
products you need to sell, there’s no guarantee that they will sell.
Ideally, you should conduct this analysis before you start a business so you have a good idea of
the risk involved. In other words, you should figure out if the business is worth it. Existing
businesses should conduct this analysis before launching a new product or service to determine
whether or not the potential profit is worth the startup costs.
A break-even analysis isn’t just useful for startup planning. Here are some ways that businesses
can use it in their daily operations and planning.
Prices: If your analysis shows that your current price is too low to enable you to break even in
your desired timeframe, then you might want to raise the item’s cost. Make sure to check the cost
of comparable items, though, so you don’t price yourself out of the market.
Materials: Are the cost of materials and labor unsustainable? Research how you can maintain
your desired level of quality while lowering your costs.
New products: Before you launch a new product, take into account both the new variable costs
as well as the fixed ones, like design and promotion fees.
Planning: When you know exactly how much you need to make, it’s easier to set longer-term
goals. For example, if you want to expand your business and move into a larger space with
higher rent, you can determine how much more you need to sell to cover new fixed costs.
Goals: If you know how many units you need to sell or how much money you need to make to
break even, it can serve as a powerful motivational tool for you and your team.