A fixed expense is an expense that will be the same total amount regardless of changes in the amount of sales, production, or some other activity. For example, a retailer's monthly rent expense of $2,000 is a fixed expense because it will be a total of $2,000 whether the monthly sales are $15,000 or $30,000. We usually qualify the definition of a fixed expense by adding: within a relevant or reasonable range of activity. In other words, if the retailer needs to have monthly sales of $80,000 it is likely that the retailer will need to rent additional space, thereby increasing rent expense to be more than $2,000 per month.
The following are some examples of expenses that are likely to be fixed within a reasonable range of sales:
- the compensation of the store manager who receives the same salary and fringe benefits every month
- the depreciation expense for a store's buildings, fixtures, and equipment
- the constant monthly amounts for security, maintenance fees, phones, internet service, insurance, lighting, advertising, etc.
Knowing the amount of a company's fixed expenses assists in understanding how its net income will change as volume changes. The total amount of fixed expenses can also be used to quickly estimate a company's break-even point.