Fixed cost example
As an example of fixed costs, let’s look at rent payments for a finance company. Suppose that the company pays £25,000,000 a year for its offices in central London. This equates to around £2,083,333.33 per month, which will be reported in the company’s fixed costs.
Regardless of whether demand for the company’s products has increased or decreased, rent will remain the same as it is not affected by consumer demand. However, fixed costs can still change over time – but not during the length of that current contractual agreement or rent schedule.
For example, they could increase if a company moves out of its current building and rent costs are more expensive than before; or they could decrease if any contractual or legal agreements change or expire. These changes are not due to shifts in production, but rather, a change in an established agreement or cost payment schedule.
Another example of a fixed cost would be a company’s utility bill, which may change according to the time of year but is generally not affected by supply of or demand for a company’s products. A company might pay £10,000 a month for heating and electricity in December, but only £2500 a month for the same in August.