Certified Financial Management Specialist Practice Exam

What type of costs remain constant regardless of the level of production?

1. Fixed Costs

2. Variable Costs

3. Marginal Costs

4. Sunk Costs

The correct answer is: Fixed Costs

Fixed costs are the type of costs that remain constant regardless of the level of production. This means that they do not fluctuate with the number of goods or services produced during a specific time period. Common examples of fixed costs include rent, salaries of permanent employees, insurance, and lease payments. Even if a company produces more or less, these costs will not change, making them predictable and easier to plan for in a budget. Fixed costs play an essential role in decision-making for businesses, particularly when analyzing breakeven points and the overall cost structure. Understanding fixed costs helps companies maintain profitability, as they can assess how many units of product they need to sell to cover these costs and start generating profit. In contrast, variable costs change with the level of production. These are costs that can increase or decrease depending on the quantity produced, such as raw materials and direct labor associated with production. Marginal costs refer to the cost of producing one additional unit of a good, and sunk costs are costs that have already been incurred and cannot be recovered.