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Fixed Cost ( Term)


( Old )

Fixed costs are those that are incurred in a predetermined amount, regardless of how many units of the product are manufactured. Purchasing the injection mold required for the new intake manifold is an example of fixed cost. Whether 1000 or 1 million units are produced, the fixed cost of the mold is incurred and does not change. Another example ist the cost of setting up the factory work area for the intake manifold assembly line. This cost is also fixed, regardless of how many units are produced.Despite the terminology, however, no cost s trully fixed. If we quadruple the production quantity, we may have to build anther production line. When considering a cost as fixed, ranges of production quantities and the assumed time horizon should be specified.


(K.T. Ulrich, S.D. Eppinger, Product design and development,4th edition, p. 215)


( New / Better )


A fixed cost is incurred if any activity is undertaken at any positive level. The cost is independent of the level of the activity and is known as a fixed cost or fixed charge. Here are three examples of fixed costs: 


- The construction of a warehouse incurs a fixed cost that is the same whether the warehouse is built with a low or high capacity level.


- A cash withdrawal from a bank incurs a fixed cost, independent of the size of the withdrawal.


- A machine that used to produce several products must be set up for the production of each product. Regardless of the batch size produced, the same fixed cost is incurred.


In these examples, a fixed cost is incurred if an activity is undertaken at any positive level, wheras no fixed cost is incurred if the activity is undertaken at all.


  ( Wayne L. Winston,S. Christian Albright,Mark Nathan Broadie,Lawrence L. Lapin,William D. Whisler, p.297 )