Fixed costs
see pp. 71–72
What you need to know •
Explain what is meant by fixed costs.
•
Be able to calculate fixed costs.
Costs are money that a business has to pay out in order to operate.
What are fixed costs?
Calculating fixed costs
Fixed costs are costs that do not change no matter how many products (units) the business produces/sells. Examples are:
Total fixed costs are calculated by adding all fixed costs together.
PL E
Fixed costs per unit are found by dividing total fixed costs by the number of units produced.
•
Advertising – e.g. the cost of print and digital products to promote the product.
•
Insurance – to protect business premises (shop/factory/office), machinery and vehicles.
Example:
•
Salaries – payments to employees which do not vary according to the number of hours worked or their level of output. Salaries are often paid monthly.
•
rent: £350
•
utilities: £50
•
salaries: £600.
A business produces 100 units per month and has the following fixed costs per month:
Loan interest – money that is paid to a lender for borrowing money.
•
Rent – a payment for the use of a factory, shop, office or other premises.
•
Utilities – payment for services used to operate the business, e.g. gas, electricity, water, internet and phone.
Fixed costs per unit = £1000 ÷ 100 = £10 per unit
M
•
Total fixed costs = £350 + £50 + £600 = £1000
SA
Stretch and challenge
Fixed costs
Costs
Even though fixed costs do not change based on output, they can change over time. For example: •
Utilities: a gas company might increase or reduce its prices every year, but utilities are essential and still have to be paid for.
•
Salaries: employees are often given an annual salary increase.
Units
Practise it!
Remember it!
1
•
2
Using an example, explain what is meant by fixed costs. (2 marks) A business has the following costs per month: advertising: £100 salaries: £500
raw materials: £20 utilities: £50.
Calculate the total fixed costs per year for the business.
30
•
Fixed costs do not change regardless of output. If a business does not sell any products, it must still pay its fixed costs such as rent and interest on loans.
(2 marks)
Revision Guide
Original material © Cambridge University Press 2022. This material is not final and is subject to further changes prior to publication.
