Markets · 6 pages · 12 min
Why a high fixed-cost business is a volume bet
A firm with high fixed costs needs enough volume to cover that base before profit appears.
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From the opening
A high fixed-cost business commits to rent, depreciation, salaried crews, or capacity before it knows how many units customers will take. Profit then depends on volume clearing that committed base, so the firm is betting that demand will be large enough, not merely that each unit contributes something. The opening covers the cost base stays put, volume must cover it, and empty capacity still costs.
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Inside
- The cost base stays put
- Volume must cover it
- Empty capacity still costs
- Extra units fall to profit
- Where the idea stops applying
- A distinction worth keeping
Sources
- Fixed cost operating leverage
- Contribution toward capacity cost