Monthly rent on a factory building that does NOT vary with the number of units produced is an example of a fixed cost.
The correct answer and explanation is :
Yes, the correct answer is: Fixed Cost
Explanation:
A fixed cost is a business expense that remains constant regardless of the level of production or sales. Unlike variable costs, which change based on output levels, fixed costs must be paid even if the company produces nothing.
Why is Monthly Rent a Fixed Cost?
- Independent of Production Levels
- The rent for a factory remains the same whether the business produces 100, 1,000, or zero units.
- It does not fluctuate with production or sales, making it a fixed rather than a variable cost.
- Long-Term Commitment
- Businesses typically sign lease agreements that specify a fixed monthly rent over a period.
- Even if the factory is temporarily shut down, the company still has to pay rent.
- Predictable Expense
- Since rent is a fixed cost, businesses can plan their finances better.
- This allows managers to calculate break-even points and set product pricing strategies accordingly.
Fixed vs. Variable Costs in Manufacturing
| Type of Cost | Example | Changes with Production? |
|---|---|---|
| Fixed Cost | Rent, Salaries, Insurance | No |
| Variable Cost | Raw Materials, Electricity (if per unit), Direct Labor | Yes |
Impact of Fixed Costs on Business
- High fixed costs mean a business needs consistent revenue to stay profitable.
- Companies with lower fixed costs have more flexibility during economic downturns.
Thus, monthly factory rent is a classic example of a fixed cost in cost accounting and managerial decision-making.