2.1. Definition of Fixed Costs

Fixed costs are constant or unchanging regardless of the level of output or activity.

2.2. The Core Idea

The primary insight of fixed costs is that they represent the baseline expenses that must be paid no matter how much or how little a company produces. Think of them as the predictable, stable foundation of a project’s financial structure. Whether a factory produces one widget or one million widgets, the cost of the factory floor space and equipment remains the same.

2.3. Example: University Tuition

A great example is the tuition structure at a university. Suppose the cost for a full-time student taking between 12 and 18 credit hours is a flat $1,800 per term. This is a fixed cost for any course load within that range. The cost does not change whether the student enrolls in 13, 15, or 17 credit hours; the tuition remains fixed at $1,800.

2.4. Transition

While fixed costs provide a stable baseline, most projects also have costs that do change directly with the level of activity.