Fixed costs: calculation formula and methods for applying them to maximize benefits

Cost management is at the heart of efficient business operations, especially understanding fixed costs, calculation formulas, and how to apply them in financial decision-making and management. Fixed costs and variable costs are key components that influence a company’s competitiveness and stability.

What Are Fixed Costs and Why Are They Important for Business

Fixed costs are expenses that remain stable and do not change with the level of production or sales. Whether a company produces a lot or a little, the amount paid for these costs stays the same during a given period.

Fixed costs play a crucial role in financial planning because they indicate the financial obligations a business must meet regardless of success or failure. Knowing fixed costs helps managers determine the minimum sales volume needed to cover basic expenses and build a foundation for sustainable growth.

Calculation Formula for Fixed Costs and How to Use Them in Decision-Making

The formula for calculating fixed costs is simple but highly useful for financial analysis:

Total Cost = Fixed Costs + (Variable Cost per Unit × Number of Units Produced)

Or, to find specific fixed costs:

Fixed Costs = Total Cost – Total Variable Costs

Practical example: If a company pays 100,000 THB monthly for factory rent, 150,000 THB for employee salaries, and 25,000 THB for insurance, total fixed costs are 275,000 THB per month, regardless of how many products are produced.

Using this formula allows companies to:

• Calculate the break-even point
• Set selling prices that cover costs
• Analyze profit and loss scenarios
• Plan investments and business expansion

Examples of Fixed Costs in Different Types of Businesses

Manufacturing Industry

• Factory rent or mortgage payments
• Depreciation of machinery and equipment
• Salaries of management and administrative staff
• Asset and equipment insurance
• Long-term loan interest

Service Sector

• Office rent
• Salaries of permanent staff
• Telephone and internet expenses
• Building maintenance costs

Online Business

• Server or cloud service fees
• Software development team salaries
• Licensing and permit fees
• Risk insurance costs

Variable Costs and How They Differ from Fixed Costs

Variable costs change in direct proportion to production or sales volume. As production increases, variable costs increase accordingly; as production decreases, they decrease.

Main Differences Between Fixed and Variable Costs

Fixed Costs:

• Remain constant regardless of production level
• Related to long-term commitments
• Used in basic budget planning
• Examples: Rent, salaries, insurance

Variable Costs:

• Change with production volume
• Offer flexibility in management
• Adjust according to market demand
• Examples: Raw materials, direct labor, packaging

Both fixed and variable costs together constitute the total costs of a business. Managing both types effectively is key to profitability.

Using Fixed Costs to Analyze Break-Even Point and Management

The break-even point is the sales volume at which total revenue equals total costs, resulting in neither profit nor loss. The calculation depends on fixed costs, using the formula:

Break-even (units) = Fixed Costs ÷ (Selling Price per Unit – Variable Cost per Unit)

Or, in monetary terms:

Break-even (THB) = Fixed Costs ÷ Contribution Margin Ratio

Example: If a company has fixed costs of 500,000 THB, a selling price of 100 THB per unit, and a variable cost of 60 THB per unit:

Break-even = 500,000 ÷ (100 – 60) = 500,000 ÷ 40 = 12,500 units

This means the company must sell at least 12,500 units to cover all costs.

Management Applications

Understanding fixed costs helps managers to:

• Assess risk: Determine how much sales need to increase to reduce loss risk
• Make investment decisions: Decide if investing in equipment (fixed costs) will reduce variable costs
• Set sales targets: Establish sales goals above the break-even point for profit
• Adjust pricing strategies: Understand how price changes affect fixed cost coverage per unit

Summary and the Role of Fixed Costs in Business Growth

Fixed costs, calculation formulas, and their application tools are essential not only for financial analysis but also as a foundation for business decisions related to investment, pricing, and growth planning.

Effective management of fixed costs involves reducing unnecessary expenses while maintaining service quality or investing in fixed costs to reduce long-term variable costs. Fixed and variable costs are not enemies but partners; managers must skillfully coordinate them.

A deep understanding of fixed costs, calculation methods, and their application in decision-making enables businesses to plan stakeholder-inclusive strategies, build stability, and prepare to adapt to market changes robustly.