Fixed costs remain constant within a relevant range of time or activity.

However, fixed costs per unit usually change with changes in the activity base. Insurance costs, rent costs, salaries of accounting personnel are typical fixed costs.

For example, Friends Corporation pays property insurance in amount of $50,000 per year. It is a fixed cost that does not vary with the number of produced valves; whether we produce 10,000 or 50,000 valves, our plant will still be assessed $50,000 in property insurance per year. Although the total fixed cost remains the same as the number of valves produced changes, the fixed cost per valve changes. The more valves are produced, the less the fixed cost per unit is. Illustration 5 shows this relationship.

Illustration 5: Fixed cost of property insurance at different production levels

The data from the table above can also be presented in a graph. Illustration 6 demonstrates how the property insurance cost behaves when total production changes.

Illustration 6: Total fixed cost graph

Note that the property insurance cost line starts at $50,000 and does not change with the increase in the number of units produced. That is because fixed cost remains constant within a relevant range.

Illustration 7 shows how the fixed cost of property insurance behaves on per-unit basis as production changes.

Illustration 7: Unit fixed cost graph

As you can see from the graph, the per-unit fixed costs decreases as the number of valves produced increases. This happens because the fixed cost per unit is calculated by dividing the total fixed cost by the number of valves produced. The total fixed cost remains the same. When the number of units produced increases, the cost per unit decreases. For example, at 10,000-unit production level, the insurance fixed cost per valve is $5.00 = $50,000 / 10,000 units. At 50,000-unit production level the insurance cost per valve is $1.00 = $50,000 / 50,000 units. This is shown on the graph by the downward-sloping curve, which indicates as production increases the insurance cost per unit decreases.

More examples of fixed costs and their cost drivers for different businesses are presented in Illustration 8.

Illustration 8: Examples of fixed costs

Fixed costs can be classified as avoidable (discretionary) fixed costs and unavoidable (committed) fixed costs.

Avoidable (discretionary) fixed costs are costs that are not required to be incurred.

In other words, you will stay in business if you do not incur such costs. For instance, Friends Corporation may spend $5,000 per year on advertising. This is a fixed cost.  However, it is avoidable because the company can stop advertising and still stay in business (although sales volume may suffer).

Unavoidable (committed) fixed costs are costs you have to incur if you want to stay in business.

For example, the property tax, office rent, and depreciation expenses are unavoidable fixed costs. Friends Corporation will not be able to continue its business if the company does not pay property tax (authorities will take action to collect), does not have an office from which it runs the business, or does not buy equipment (and incurs depreciation expenses) to produce valves.