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What is a Fixed Cost?

A fixed cost is an expense that stays the same regardless of how much a business produces or sells, at least within a normal range. Rent, insurance, and salaried staff are typical examples. Fixed costs are paid even when output is zero, which makes them central to the break-even calculation.

The defining feature is that fixed costs do not move with volume. Whether a bakery sells a hundred loaves or a thousand, its monthly rent is the same. That stability cuts both ways: in a busy month the cost per unit falls, but in a quiet month the same bill still has to be paid from whatever revenue arrives.

Because fixed costs are unavoidable in the short term, they are the first thing a business must cover before it makes profit. The break-even point is the sales level at which contribution from each unit exactly covers total fixed costs. A business with high fixed costs has high operating leverage: small changes in sales produce large swings in profit.

Example

A bakery pays €2,000 a month in rent and €3,000 in fixed salaries regardless of how many loaves it sells. Those €5,000 are fixed costs. In a month it sells nothing, the €5,000 is still due; in a busy month, the same €5,000 is spread over many more loaves.

Questions

What is the difference between fixed and variable costs?

Fixed costs stay the same as output changes, like rent and salaries; variable costs rise and fall with output, like ingredients and packaging. Most businesses carry both, and the mix shapes their break-even point.

Why do fixed costs matter for break-even?

Because they must be covered before profit exists. The break-even point is the sales volume at which the contribution from each unit exactly equals total fixed costs, so the higher the fixed costs, the more must be sold before turning a profit.

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