CFA Level I · CFA Level I Exam · Financial Statement Forecasting in Equity Valuation
When forecasting a company's operating costs, an analyst most likely classifies a cost as a fixed cost if it:
A cost is fixed when its total stays constant within the relevant range of output, regardless of small changes in volume. Rent is an example. Costs that move in proportion to units produced or revenue are variable, so they do not fit the definition of a fixed cost.
- Achanges in proportion to units produced
- Bstays constant in total within the relevant range of outputCorrect
- Crises each year with the company's revenue growth
Explanation
A fixed cost stays constant in total over the relevant range of activity, such as factory rent. Costs that change in proportion to output are variable costs, and costs that follow revenue growth behave as variable costs.
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