A fixed cost is a cost that does not vary in the short term, irrespective of changes in production or sales levels. Examples of fixed costs are:
- Interest expense
- Property taxes
Over the long term, few (if any) costs are truly fixed. For example, a thirty-year lease can be eliminated after the thirtieth year, so the expense is actually variable if viewed over a 31-year time period.
Companies with a high proportion of fixed costs have a high breakeven point, above which they earn outsized profits. Companies with a low proportion of fixed costs have a low breakeven point, above which they earn more modest profits.
Companies with high fixed costs have a greater incentive to engage in price wars to gain some additional incremental revenue, because they can recognize the bulk of these additional revenues as profit.