Step fixed costs

Step fixed costs are those costs which remain constant or do not change within a certain range of production level/ activity, but will change to new constant value if the production/ activity falls out of this range of production level/ activity. Step fixed costs will increase to a new constant value or fall to a new constant value depending on whether the upper limit or the lower limit of that production level/ activity, respectively is breached. This concept is best seen with an example.

Example: Step fixed costs

ABC Company is a manufacturing concern involved in the production of footballs. ABC uses machinery acquired on operating lease for a monthly rental of $ 800. Monthly production capacity of the machinery is 5,000 footballs. Workout monthly rental cost in each of the following cases:

  1. If planned production is 3,000 footballs.
  2. If planned production is 4,000 footballs.
  3. If planned production is 5,000 footballs.
  4. If planned production is 6,000 footballs.
  5. If planned production is 12,000 footballs.

Answer: Monthly rental cost depends on the number of machineries used. If the production is not more than 5,000 footballs, rental cost will be a constant of $ 800. When the production exceeds 5,000 footballs, rental cost would change to a new constant value of $ 1,600 (2 machineries x $ 800 per machine). Rental cost in each of the above cases would be:

  1. $ 800        (1 machine x $ 800 per machine)
  2. $ 800        (1 machine x $ 800 per machine)
  3. $ 800        (1 machine x $ 800 per machine)
  4. $ 1,600     (2 machines x $ 800 per machine)
  5. $ 2,400     (3 machines x $ 800 per machine)