Fixed Costs

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Fixed Costs

Fixed Costs are costs that stay the same over a relevant range.

Let’s say the rent for my shoe factory is $1200. If I make 100 pairs of shoes or 60,000 pairs of shoes, my rent will not change. It is fixed. Let’s say my factory supervisor makes $100,000. It makes no difference whether the factory makes 100 pairs of shoes or 60,000 pairs of shoes, his salary will not change. It is fixed. If I decide to add a second shift at my factory and hire a second supervisor to work the 5PM to 1AM shift, supervisory salaries would increase. In this case supervisory salaries are fixed over a relevant range of 8 hours a day. Supervisory salaries are fixed based on the assumption that the factory is open only 8 hours a day. Eight hours is the relevant range.

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