Fixed cost does not change with output in the stated period.
Total fixed cost does not change with output within the stated period and capacity. Total variable cost changes as output changes. Total cost is their sum. A fixed payment can continue when current output is zero, but fixed does not automatically mean sunk: a sunk cost cannot be recovered and is unaffected by the present choice. Classify the actual contract and decision, not just the item name. Staff costs, for example, can contain a fixed salary and an output-related component.
- Total cost (TC)
- Total cost = total fixed cost (TFC) + total variable cost (TVC). Q means output, the number of units produced in the stated period.
- Fixed and variable
- Fixed cost stays unchanged as output changes within the stated period and capacity. Variable cost changes with output, such as materials used for extra batches.
- Sunk
- A sunk cost cannot be recovered and is unaffected by the present choice. A payment is not sunk merely because it has already been made: a refundable deposit can be recovered.
Apply the distinction
Contracts matter
A salaried worker and a per-piece worker can create different cost patterns; do not classify by the word labour alone.
Zero output
TVC is zero in the stated simple schedule, while an unavoidable fixed cost remains. Other real-world avoidable commitments need their own analysis.
| Q | TFC ($) | TVC ($) | TC ($) |
|---|---|---|---|
| 0 | 18 | 0 | 18 |
| 1 | 18 | 10 | 28 |
| 2 | 18 | 24 | 42 |
| 3 | 18 | 42 | 60 |
| 4 | 18 | 66 | 84 |
| 5 | 18 | 96 | 114 |
Worked example: Add the workshop's weekly costs
A workshop has an unavoidable $18 weekly charge. Its variable cost for zero to five batches is $0, $10, $24, $42, $66 and $96. The charge is the only fixed cost.
- At zero output, total cost is $18; variable cost is zero under the stated schedule.
- At three batches, total cost is 18 + 42 = $60. At five it is 18 + 96 = $114.
- The $18 is fixed for this week. Whether any past payment is recoverable is a separate question requiring contract information.
- If the firm can cancel a future rental before committing, that future payment is avoidable even if it would have been fixed with respect to output after commitment.
Watch out for this
Every fixed cost is sunk.
Whether a payment changes with output is separate from whether it can be recovered. Check the period, contract and available alternatives.
Check your understanding
A refundable $500 equipment deposit is independent of this week's output and can be recovered by returning the equipment. Is it automatically sunk?
- Yes, because it is not per unit.
- Yes, because it has already been paid.
- No; the stated refund makes it recoverable.