Explain fixed cost with suitable examples.

Fixed Cost refers to those costs which remain fixed in amount irrespective of changes in the volume of output during a given period of time. Such costs do not change with increase or decrease in the level of activity, upto a certain limit (called the relevant range).

Key features of fixed cost:

1. Total fixed cost remains constant at all levels of output within the relevant range.
2. Fixed cost per unit changes with the level of output. This is shown in the graph.

• For example, if total fixed cost is ₹1,50,000 and output is 30,000 units, fixed cost per unit is ₹5. If output rises to 60,000 units, fixed cost per unit falls to ₹2.50.

1. Time-based — Fixed costs are related to the passage of time, not to activity.
2. Incurred even at zero output — Fixed costs continue to be incurred even when production is nil.

Examples of fixed cost:

• Rent of the factory or office building
• Salary of the factory manager / managerial staff
• Insurance premium
• Depreciation of plant and machinery (on time basis)