Which statement best describes the nature of fixed expenses in a small business?

Which statement best describes the nature of fixed expenses in a small business?

• A. They vary with activity levels
• B. They are always zero
• C. They remain constant in the short term
• D. They are paid only when funds are available

Answer: (C)

Fixed expenses are costs that stay the same no matter how much you produce or how many jobs you complete, at least over the short term. In a small landscaping business, these include things like rent, permanent salaries, insurance, and depreciation. They don’t rise or fall with activity level within a certain period, which is why the statement that they remain constant in the short term is the best description. Over longer periods, some fixed costs can change if contracts are renegotiated or capacity shifts, but in the near term they stay constant. The other ideas don’t fit: costs that vary with activity are fixed-costs’ opposite (these are variable costs). Some fixed costs aren’t zero—the business still pays rent or insurance even when there are few or no jobs. And fixed costs aren’t tied to cash-on-hand timing—payments are often due on a schedule (monthly, quarterly) rather than only when funds are available.

Fixed expenses are costs that stay the same no matter how much you produce or how many jobs you complete, at least over the short term. In a small landscaping business, these include things like rent, permanent salaries, insurance, and depreciation. They don’t rise or fall with activity level within a certain period, which is why the statement that they remain constant in the short term is the best description. Over longer periods, some fixed costs can change if contracts are renegotiated or capacity shifts, but in the near term they stay constant.

The other ideas don’t fit: costs that vary with activity are fixed-costs’ opposite (these are variable costs). Some fixed costs aren’t zero—the business still pays rent or insurance even when there are few or no jobs. And fixed costs aren’t tied to cash-on-hand timing—payments are often due on a schedule (monthly, quarterly) rather than only when funds are available.