What it is:
How it works (Example):
Fixed costs are those costs incurred by a company which are unrelated to fluctuations in productivity or sales. Examples of fixed costs include insurance premiums and leases on property. Fixed costs should not be confused with variable costs, which do fluctuate in direct proportion to productivity levels.
Why it Matters:
The unchanging nature of fixed costs is beneficial for companies with increasing levels of revenue, because fixed costs allow for quicker marginal profitability at high productivity levels. However, for companies struggling to generate enough revenue to meet obligations, fixed costs can be debilitating.