Cambridge O Level Business Studies · Syllabus 7115 · Operations Management
Fixed Costs
What is Fixed Costs?
Costs that do not change directly with the level of output within the relevant period and range of production, such as rent, insurance, business rates and salaried management. Fixed costs still change over a longer period or when capacity changes - a second unit or a renewed lease steps them upward - and they continue to be incurred even when output is zero.
This definition is part of the Operations Management chapter in Cambridge O Level Business Studies.
Fixed Costs in context
Production methods, cost behaviour and break-even analysis together decide whether a business can make what customers want at a price the market will support. Job, batch and flow production are not ranked best to worst; volume, variety, customisation, capital and demand stability determine which method fits a given product. Fixed costs stay the same regardless of output, while variable costs rise directly with it, and contribution per unit — price minus variable cost — sets both the break-even output and the margin of safety. Economies of scale then reduce average cost as output grows, while diseconomies of scale raise it once a business becomes too large to coordinate effectively.
Common mistakes with Fixed Costs
- “Fixed costs never change.” Correction Fixed costs do not change directly with output within the relevant period and range. Rent rises when the lease is renewed, and it steps up sharply when the business takes a second unit. That is a change in capacity, not a change with output.
Examiner tips on Fixed Costs
- The unit-cost line is the one that gets misremembered. Flow production has the lowest unit cost at high volume, because its enormous fixed costs are spread across an enormous output. Run the same line at a third of capacity and the unit cost can exceed batch production. Never write “flow production is cheapest” without the volume condition attached.