Fixed costs
DCFCosts that do not move with volume, at least within a normal operating range.
Rent, salaried headcount, insurance, depreciation on existing capacity: these are incurred whether the business sells one unit or a million. They create operating leverage.
Fixed is a statement about a range and a timeframe, not an absolute. Rent is fixed until the lease expires or a new site is needed; salaried headcount is fixed until the company restructures. Push volume far enough in either direction and fixed costs step.
The distinction from variable costs drives contribution margin, break even analysis and any sensible scenario work. Without it, a model cannot answer what happens to profit if volumes fall 15%, which is usually the question that matters.
In a downturn, the proportion of fixed costs is close to a measure of risk: it determines how quickly losses arrive and how much room management has to respond.
Worked example
Revenue 1,000, fixed costs 500, variable costs 300, so EBIT is 200.
Revenue falls 20% to 800. Variable costs fall to 240 but fixed costs stay at 500, so EBIT collapses to 60, a 70% fall.
A 20% revenue decline produced a 70% profit decline. The proportion of fixed costs is close to a direct measure of downside risk.