Definition of Fixed Expense
A fixed expense is an expense whose total amount does not change when there is an increase in an activity such as sales or production. The words within a relevant or reasonable range of activity are normally added to the definition because at an extremely high volume or low volume, a change will likely occur.
Examples of Fixed Expenses
Let's assume that a retailer's monthly rent is $2,000. If the rent will remain at $2,000 whether the monthly sales are $15,000 or $30,000, we will say that the rent is a fixed expense. (Of course, if sales triple or drop to be 20% of the normal amount, the rent will likely have to change. Nonetheless, the present rent of $2,000 is considered to be a fixed expense since the extreme conditions are outside of the relevant range for short-term analyses.)
Other examples of expenses that are likely to be fixed within a reasonable range of retail sales include:
- The store manager's annual salary
- The depreciation expense for the buildings, fixtures, and equipment
- The fixed contracts for security, maintenance fees, phones, internet service, insurance, lighting, advertising, etc.
Knowing the amount of a company's fixed expenses assists in understanding how the retailer's 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.