What is Fixed Costs?
Fixed costs are expenses that remain constant in total within a relevant range of activity, regardless of the volume of production or sales. They include rent, base salaries, depreciation, insurance, and license fees. Fixed cost per unit decreases as volume rises and increases as volume falls.
How It Works
- Identify costs that do not change with short-term volume swings.
- Confirm the relevant range; outside it, capacity must expand and fixed costs step up.
- Compute break-even volume = Fixed Costs / Contribution Margin per unit.
- Use operating leverage to assess how a change in sales affects EBIT.
- Monitor fixed-cost coverage closely during demand downturns.
Saudi Context
Saudi SMEs face significant fixed costs from commercial property rent in Riyadh and Jeddah, GOSI employer contributions, Saudization-driven payroll, and Iqama and Saudization fees. Strict cash-flow planning during slow seasons is critical because these costs continue to accrue regardless of revenue.
Example
A retail store pays SAR 30,000 per month in rent and SAR 50,000 in base salaries, for SAR 80,000 of fixed costs. Whether monthly revenue is SAR 100,000 or SAR 300,000, these costs do not change. Per-unit fixed cost falls as volume increases, improving margins through operating leverage.