Fixed Cost refers to business expenses that remain constant regardless of the level of production or sales volume within a specific period. These costs do not fluctuate with output, meaning a company must pay them even when there is little or no production. Common examples include rent, insurance premiums, salaries of permanent employees, and depreciation of equipment.

From a financial perspective, fixed costs are an essential component of a firmís total cost structure. When combined with variable costsówhich change with production levelsóthey determine the overall cost of goods or services. Understanding this distinction helps businesses in pricing, budgeting, and profitability analysis.

In the short term, fixed costs remain stable; however, they can change in the long run due to business expansion, lease renewals, or restructuring. For example, a manufacturing firmís factory rent is a fixed cost, but building a new facility increases the companyís long-term fixed expenses.

Fixed costs are crucial for calculating the break-even point, which shows the level of sales needed to cover all expenses. Beyond this point, any additional sales contribute directly to profits. Companies with high fixed costs often face greater financial risk during downturns since these obligations persist even when revenues fall.

Managing fixed costs effectively is vital for financial stability. Businesses often analyze their operating leverageóthe proportion of fixed to variable costsóto assess how sensitive their profits are to changes in sales. A higher operating leverage implies higher potential profits during growth periods but also higher risks during downturns.

In summary, Fixed Costs represent unavoidable business expenditures that support ongoing operations. A clear understanding of these costs helps companies maintain efficiency, make strategic investment decisions, and achieve long-term profitability.