To explain fixed and variable costs definition we will Start with the simple definition of fixed cost which states. It is a cost that occurred due to the delivery or selling of goods and services. It’s not changed by increasing or decreasing its measure.
Fixed costs are the charges occurred which are a must for the organization independent of business activity if any.
Fixed cost contains both the factor cost as well as expenditure for maintaining the business cost.
Analyzing Fixed and Variable Costs Definition:
Fixed cost is that working expense of the business showcasing little respect towards the level of creation
A breakeven analysis evaluating the creativity and deals level below. Which a business or organization neither profited nor receive any loss.
The aggregate cost structure of any organization is shaped by the variable as well as a fixed cost, ensuring its essential part in the surety of profitability
Cases of Fixed Costs:
A deep analysis of various expenses as done by bookkeepers let them know whether the expenses are fixed or variable.
In aggregate cost structure of an organization higher fixed cost generates a higher amount of revenues to get back the initial investment
From time to time routinely changes in fixed costs showcase changes occurred
Cases of fixed costs include interest charges, insurance, property expenses, utility charges and reduction of advantages as time passes
The pay rates paid to the representative of an organization irrespective of the work hours also goes under the fixed cost
If the building is rented the rent is also included under the umbrella of fixed cost.
Fixed Cost and Economics:
Calculating the cost of goods different factors and fixed costs are considered.
Variable costs per thing remain moderately level, and the aggregate variable costs change proportionately to the number of item things created.
As the number of things created increases the fixed cost per thing declines. For an organization, it is easier and better to manage the economics of scale by distributing the fixed cost over a greater no of units created and sold.
For simple explanation, $1000 rent on 1000 goods indicates 1$ rent on each while increasing the production of the goods to 2000$ each good get 50 pennies in its fixed cost.
Those organizations which control the fixed costs and variable costs over the years seem to have the best measure of working influence.
This implies after an organization accomplishes the breakeven point.
Else meet any further increases in a deal will deliver higher profits to the extent to deals increase for an organization up to a point where fixed costs per unit sold wind up noticeably immaterial.
On the contrary, reduction in deal volume can result in an uneven and higher decrease in profits.
A case of organizations with high fixed cost part are service organizations. Which need to make expansive interests in infrastructure and have in this way vast devaluation expenses with moderately stable variable costs per unit of power created.
Fixed Cost definition Case Study:
Fixed cost also includes those contacts for longer duration which includes fixed payments of rent, loan interest, and salaries of contracts.
Any organization or firm having these sorts of troubles or we can call it holes needs to question itself while looking for getting out of waters.
Isn’t the hole gonna get deeper with the reduction in production?
How to Generate Private Cash Flows to Respond Fixed Costs:
To fill this hole and eulogize its fixed costs an approach towards positive cash flows can create hope.
Greater is the cash flow the greater is the chance to fill this hole as well as generate revenue.
Fixed Costs and Ground Realities:
You can’t just run on hopes as the reality is quite different then we imagined.
The firm’s condition can get a lot worse by producing goods.
As explained the earlier reduction in the firm’s output gonna create cash flow which will be negative rather than positive.
If it happens so then closing down is the production would be a viable option rather then running the production.
By closing down only the fixed cost will be lost and its financial hole would not get deeper.
Unfinished Fixed Cost- The Final Reason to the Shutdown:
If the closure of production is based on the low prices then as the productions are temporary then so as the closure.
This does not lead the firm to go out of the business because of a mere short time shutdown.
On the other side, many organization and firms will close its production units based on the market prices no matter the cash go positive or negative.
Recommended Article: What is Price Ceiling.
Several Cases of Controlling Fixed Cost:
1: Oil production is one of the best examples, ever well have its production costs.
As the prices decree in the market, the well is closed for further production considering it is better to halt than to keep producing making the variable cost exceeding the revenue.
2: Seasoning resort a good example of keeping on and off to generate revenue rather than loss.
As during the winter season, the hotel rooms near ski resorts in New Hampshire are much much more than in summers.
During summers resorts offer a low market rate and many close to prevent negative impact.
Thus understanding the fixed cost they lose only that rather than generating outflow of money.
3: During the economy hits or slowdown many production companies halt their production.
For instance during the tenure of 2007-009 in the US many companies shutdown.
4: To keep the electric generating plants, factories that make fiber optic cable, automobile factories, chemical plants, textile mills, and even the plant in McIntosh, Alabama. That makes the artificial sweetener Splenda in working condition during the downturn.
To wait for the end of the downturn many firms close their production.
There is a small crash for consulting firms that are specialized in helping firms by shelving their factories. (the main problem is how to properly store idle machinery so that it will work again when it is eventually brought back into service).
5: Those firms that keep mothballing the factories and equipment during the downturn are hoping to get them back on.
But the duration of downturn varies and can lead to different circumstances depending on the firms.
So many firms decide on shutting down the operations completely as the market condition does not improve as a final resort to terminate the fixed cost.
Summarizing all, the only viable option to prevent this is the pre-planning of everything including the fixed and variable cost so the fixed cost can easily be fulfilled.