Entrepreneurship and Small Business (ESB) Certification Practice Exam

Which of the following is an example of a fixed cost?

1. Employee wages

2. Utilities

3. Insurance

4. Packaging materials

The correct answer is: Insurance

A fixed cost refers to a cost that does not change with the level of production or sales within a certain range. It remains constant regardless of the business activity, meaning it must be paid regardless of output or sales. Insurance is a prime example of a fixed cost because it requires a set payment, typically on a monthly or annual basis, that does not fluctuate with the volume of business operations. Whether the company operates at a high level of production, a moderate level, or none at all, the insurance premium must still be paid. In contrast, employee wages can often fluctuate based on hours worked or commissions earned; utilities typically vary depending on usage; and packaging materials are directly linked to production levels, as more production requires more packaging. These costs are variable or semi-variable in nature, making them distinct from fixed costs like insurance.