Which is an example of a fixed cost?

• A. Materials used in production
• B. Commission payments for sales staff
• C. Rent for factory space
• D. Electricity usage based on production volume

Answer: (C)

The idea being tested is how costs behave in relation to production levels: fixed costs stay the same in the short term, while variable costs change with output. Rent for factory space is the best example of a fixed cost because you pay the same amount regardless of how much you produce during a given period. It’s an overhead expense tied to using the space, not to how many units you manufacture.

Materials used in production vary with output, so their total cost rises as production increases. Commission payments for sales staff depend on sales activity, making them variable costs. Electricity usage typically increases with production volume, so it is also a variable cost.

Understanding fixed costs helps with planning and break-even analysis, where you spread those constant costs over more units to lower the cost per unit as output rises.