How do fixed costs differ from variable costs?

Fixed costs are expenses that do not change with the level of production or sales within a certain range of activity. This means that no matter how much a company produces—whether it's many units or just a few—fixed costs remain constant. Common examples of fixed costs include rent, salaries of permanent staff, and insurance. These costs are incurred regardless of the production volume, making them predictable and stable over time.

In contrast, variable costs change directly with the level of production. As production increases, variable costs typically rise, and as production declines, these costs decrease. This distinction is crucial for financial planning and managing production because it helps businesses understand their cost structure and how it affects profitability.

Other potential answers do not accurately capture the characteristics of fixed and variable costs, leading to a clearer understanding of how these two types of costs interact in various business scenarios.