What is the difference between fixed costs and variable costs?

Fixed costs are expenses that do not vary with the level of production or sales within a relevant range. This means that regardless of how many units a company produces or sells, these costs remain constant. Examples of fixed costs include rent, salaries of permanent staff, and insurance. No matter how much a company produces, these costs will not change, which is why option C accurately describes the nature of fixed costs.

In contrast, variable costs fluctuate with the level of output. These costs increase as production increases and decrease when production decreases, such as costs for raw materials or labor that is tied directly to production levels.

Understanding the distinction between these two types of costs is crucial for financial planning and budgeting, as they affect how a company calculates its overall costs, pricing strategies, and break-even analysis. Knowing that fixed costs remain the same regardless of production allows management to make informed decisions about scaling operations and managing cash flow.