How do fixed costs behave as revenue increases?

Fixed costs are expenses that do not change with the level of sales or production. This includes costs such as rent, salaries, and insurance, which remain constant regardless of how much revenue is generated in a given period. Therefore, as revenue increases, fixed costs stay the same, leading to a decrease in the per-unit cost of fixed expenses as production volume increases.

This characteristic is crucial for businesses because it means that, in scenarios of increased revenue, the fixed costs will not contribute to additional financial pressure, enabling greater profit margins as sales grow. Understanding this behavior is essential for compensation professionals as they analyze cost structures and their impact on overall profitability and budgeting for employee compensation.