In simple terms, The Fixed cost is a cost that does not change proportional to the production volume of the company.
What is a Fixed Cost? Definition
Fixed cost is a cost that remains fixed for a certain amount of money irrespective of the company’s production volume. it is totally independent of the number of goods sold. In general, most of the companies have two different costs one is a Fixed cost and another one is a Variable Cost which combined will result in the total cost of the company.
Total Cost = Fixed Cost + Variable Cost.- Key Points
- Fixed cost is different from variable cost
- Fixed cost is charged irrespective of goods sold by a company.
Understanding Fixed Cost
Every company has two different costs Fixed cost and Variable Cost. Variable cost may increase and decreases proportionally to the companies production rate which means it totally depends on the production rate of the company. whereas Fixed cost is cost spent by companies irrespective of their sales, the fixed cost can be described as the rental cost of land occupied for the company, machinery rent cost, and other bank interests. This means the fixed cost also changes accordingly to the rents or interests charged by providers.
Does Fixed Cost Affect Profit Margins of Companies? Example
Simply, Yes fixed cost may affect the profit margins. Let us explain in detail easily by the table.
| Number Of Sales | Total Fixed Cost | Total Variable Cost | Total Cost = FC + VC | Total Sales Made | Profit |
|---|---|---|---|---|---|
| 20 Cakes | $900 | $300 | $1,200 | $700 | - $500 |
| 45 Cakes | $900 | $675 | $1575 | $1575 | $0 |
| 60 cakes | $900 | $750 | $1,650 | $1,750 | $100 |
Formula For Fixed Cost
Let’s take Fixed cost ( FC ), Total cost of production ( TCP ), and variable cost ( VC ) of the single unit multiplied by no of units sold ( N ).
FC = TCP – VC*N.
Key Points:
- Fixed costs may also change but it totally depends on providers of land, machines, and loans.
- The fixed cost can affect the companies profit margins.
- A fixed cost is essential for calculating the profits.
Thanks For Reading.
