Total Fixed Cost Formula
Total fixed costs are costs that do not change with the level of production or sales. These costs remain constant, regardless of the volume of goods or services produced by a business. They are the opposite of variable costs, which change directly with production levels.
The formula for total fixed cost is straightforward, as fixed costs are, by definition, constant:
Total Fixed Cost = ∑ of all fixed costs
While the formula is simple, it’s important to accurately identify which costs are truly fixed. Examples of fixed costs include:
- Rent or lease payments
- Salaries of permanent staff
- Insurance premiums
- Depreciation (using the straight-line method)
- Property taxes
- Annual licensing fees
It’s worth noting that fixed costs remain constant only within a certain production range or period. Beyond this range, the fixed costs might change. For instance, if a company outgrows its current factory and needs to rent additional space, the rent (a fixed cost) will increase.
To find the total fixed cost for a business, simply sum up all the individual fixed cost components for a given period.
Example of the Total Fixed Cost Formula
Let’s illustrate the concept of total fixed costs with a hypothetical example.
Scenario: “CityCafe Coffee Shop”
CityCafe is a coffee shop that sells various beverages and pastries. To determine its monthly fixed costs, we need to consider expenses that do not change regardless of how many cups of coffee they sell.
Monthly Fixed Costs Breakdown:
- Rent: $3,000
- Insurance: $500
- Salaries for permanent staff (2 employees receiving $1,500 each): $3,000
- Internet and utilities: $300
- Coffee machine lease: $200
- Business license and fees: $100
To find the total fixed cost for CityCafe for the month:
Total Fixed Cost = Rent + Insurance + Salaries + Utilities + Machine Lease + Licenses
Total Fixed Cost = $3,000 + $500 + $3,000 + $300 + $200 + $100
Total Fixed Cost = $7,100
Interpretation:
CityCafe’s total fixed costs for the month amount to $7,100. This means that, irrespective of the number of coffee cups sold during the month, the business would incur these costs. Understanding its fixed costs is vital for CityCafe as it helps in pricing products, setting sales targets, and assessing profitability thresholds.
