What is an example of a fixed cost?

Lease payments for equipment represent a fixed cost because they remain constant regardless of the level of production or business activity. Fixed costs are expenses that do not change with the volume of goods or services produced by a business; they are incurred over a specific time period, such as monthly or annually.

In this context, lease payments are predictable and typically contractual, meaning that the business is obligated to pay the same amount every month regardless of whether it uses the equipment to its full capacity or not.

Conversely, elements such as worker overtime payments, fluctuating utility costs, and material costs that vary with production are examples of variable costs. These costs can change based on the level of output or usage, making them variable rather than fixed. For instance, overtime is incurred when production demand increases, utilities may vary significantly based on usage, and material costs typically increase as more products are produced. Thus, lease payments for equipment stand out as the correct example of a fixed cost in this scenario.