Constant regardless of activity
Fixed costs remain stable over time, independent of how much a company produces or sells.
The fixed cost analysis process
1
Identify fixed expenses
Review financial statements to list costs that remain unchanged over time—like rent, salaries, software subscriptions, and depreciation.
2
Separate from variable costs
Differentiate between fixed and variable costs to understand cost structure. Variable costs rise with production, fixed costs do not.
3
Calculate total fixed costs
Add all fixed expenses to determine the baseline cost the business must cover each period.
4
Use in breakeven and margin analysis
Incorporate fixed costs into pricing models and breakeven analysis to understand revenue targets and profitability thresholds.
Impact on business performance
Fixed costs shape how a business scales and survives:
Higher fixed costs raise the breakeven point but can lead to higher operating leverage and profit margins at scale.
Lower fixed costs reduce risk during downturns and increase flexibility.
Knowing your fixed cost base allows smarter cash flow planning and investment decisions.
Real-world examples
Case study: Fixed costs in a manufacturing business
A small factory pays ₹1.5 lakh monthly in rent, ₹2 lakh in staff salaries, and ₹50,000 in equipment depreciation—regardless of whether it produces 10 or 1,000 units. These are fixed costs. The company needs to factor in this ₹4 lakh/month baseline when pricing products and planning output to ensure profitability.
Frequently asked questions about fixed costs?
Fixed costs stay the same regardless of output; variable costs increase or decrease with production volume (e.g., raw materials).
Yes. While fixed in the short term, they can change over time, for example, a rent increase or change in staffing levels.
Startups with high fixed costs face more risk during early stages when revenue is uncertain. Keeping fixed costs low improves survival odds and flexibility.