Step Fixed Costs

Definition: Costs that don’t increase with each unit produced. It’s usually a larger cost that you have to incur to make a large number of units. You sometimes can’t make one more unit without incurring a fixed cost.

Example: Your production may increase to the point that you need to hire a new employee or buy new equipment to handle future sales. The employee and equipment are step fixed costs.

Why It’s Important: Deciding to sell more may require you to make a step fixed costs. The additional sales may not be enough to cover the step fixed costs. You need to know your step fixed costs and when you will need to make them when budgeting or making sales volume decisions.

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