An illustration of fixed costs Following on from Learning exercise 3.8, apart from the variable…

An illustration of fixed costs Following on from Learning exercise 3.8, apart from the variable costs already discussed, Lambchops has the following costs, all of which are expected to remain fixed for the levels of production being contemplated:

• factory rent: $60000 per year

• administrative staff salaries: $150000 per year

• other administrative costs: $57500 per year

• administration-related utility costs: $30000 per year.

What are the total fixed costs for one year? The total fixed costs would be all of the costs listed above: $297500. Why are these fixed costs?

They are considered fixed costs because they are assumed not to change within the period of analysis for the amount of production being planned. Will they be fixed forever? They will not be fixed forever. Costs like rent and salaries will change across time. The costs are considered to be fixed for a particular period, which might be a year, and only for a particular range of activity, beyond which additional fixed costs might be incurred.

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