Constrained Fixed Cost
Constrained fixed cost is a pivotal component of the cost structure of a business and can have a drastic effect on the operations and profitability of a company. Fixed cost is the cost that an organization undertakes that is not dependent upon the output of the company or its level of activity. This cost is constant regardless of the production and operations of the company. The fixed cost could be in the form of lease payments, office rental, computer rental, telephone bills, insurance payments, etc.
Constrained fixed cost is different from the normal fixed cost as the organization is restricted to using the fixed cost in a certain way. This constraint is imposed due to external factors or the limitations specified by the law. For example, if a company operates in an agricultural area and produces wheat, then the fixed cost cannot be suddenly increased to cover the acquisition costs of other crops. Furthermore, if it is a company with international operations and has to comply with the laws of the countries in which it operates, then it has to keep certain fixed costs in line as per the regulations of those countries.
The presence of constrained fixed cost can have a large impact on the profitability of the organization. Firstly, it reduces the flexibility of the organization to change their cost structure as per the business environment. They cannot shift the costs to a variable structure or use other capital structures to better adapt to the changes in the industry. Secondly, constrained fixed cost can be difficult to manage, as it can lead to increased administrative costs and the cost of preparation of the accounts and financial statements.
Organizations should look to minimize constrained fixed costs as much as possible. It makes the operations more flexible, reduces costs, and opens more opportunities for the organization to be competitive and make profits. Companies should analyze their constrained fixed costline items and assess which of these costs can be optimized or negotiated with the third party involved in the transaction. Organizations should also try to use technology to its advantage. Automation of services, outsourced services, and cloud technology can be used to reduce operational costs to a significant extent.
Another way to optimize constrained fixed costs is to negotiate with suppliers and lenders and try to obtain favorable terms and better interest rates on loans. Discounts can also be obtained in bulk orders, long-term contracts, and the usage of specialized services. Companies should also evaluate their options and identify the external factors that may be contributing to the constrained fixed cost and strategies to mitigate the effect of those external factors.
However, it is important to note that constrained fixed cost cannot be eliminated completely, as some of the costs are essential for the operation of the organization, and it is also ideal to have some form of fixed cost, as it provides stability to the cost structure. Companies should keep an eye on changes in the external environment and use the appropriate strategies to optimize the constrained fixed cost. By keeping a proper knowledge and understanding of fixed cost, organizations can boost their profitability and ensure long-term success.
