Future Business Leaders of America (FBLA) Agribusiness Practice Test

What are "fixed costs" in a business context?

1. Variable expenses dependent on production levels

2. Costs that remain mostly constant as production changes

3. Costs that fluctuate with market demand

4. Costs associated with debt repayment

The correct answer is: Costs that remain mostly constant as production changes

In a business context, fixed costs refer to expenses that do not change with the level of production or sales. These costs remain relatively constant even when the company increases or decreases its output. Examples of fixed costs include rent, salaries of permanent staff, insurance, and equipment leases. Since these costs do not vary directly with production levels, businesses need to allocate them across units produced to understand their overall cost structure. The option regarding variable expenses, while relevant to overall cost discussion, does not define fixed costs accurately. Fluctuations with market demand pertain more to variable costs, which do change depending on production levels. Costs associated with debt repayment may be fixed, but they are a specific type of fixed cost and do not encompass the broader definition of what constitutes fixed costs in total. By recognizing fixed costs as stable expenses, businesses can better manage their budget and strategic planning.