Fixed Cost

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A fixed cost is a business expense that does not change with each additional unit produced or sold; an increase or decrease in sales volume or production will not impact fixed costs. Generally, fixed costs do not change because they are predetermined by contracting parties. Fixed costs are also known as overhead costs or indirect costs.

Fixed costs = Total production costs — (Variable cost per unit * Number of units produced)

Some examples of fixed costs include rent or lease payments, fixed-rate interest expenses, insurance, and employee salaries. Fixed costs are not incurred directly from production, but rather facilitate or support it. As a result, negotiating for a favorable fixed cost schedule can enable a business to become more profitable at scale as profit margin on each unit increases.