Question

Explain how fixed cost differ from a variable cost. Use specific examples to solidify your point of view.

Answer 1

A fixed cost does not depend on the number of units produced or sold. It remains constant for any amount of unit produced/ sold in a particular period of time. For example, a store must pay the rent for space irrespective of the sales volume of a month. The monthly rent remains the same even when there are no sales for a month. Therefore, rent is a fixed cost. On the contrary, a variable cost is incurred on a per unit basis. For each unit produced or sold, a variable cost is incurred. For example, the same store consumes packaging materials for the items it sells. If there are no sales, there will be no consumption for the packing material. The packing material will be consumed an exactly equal amount of units sold (assuming that each unit is packed in one single package). So, the cost of packing material will be considered a variable cost. On a per unit level, the variable cost is always the same, irrespective of the volume. However, for the fixed cost, the per unit amount reduces as the volume increase as the total fixed cost in a given time period is constant.