Differentiate fixed versus variable operating expenses and provide a forecasting approach for each in a model.

• A. Fixed OPEX remains constant in the near term; variable OPEX scales with activity.
• B. Variable OPEX remains constant; fixed OPEX scales with activity.
• C. Both fixed and variable OPEX scale with headcount.
• D. Fixed OPEX is zero; variable OPEX equals revenue.

Answer: (A)

In forecasting operating expenses, separate costs by how they respond to changes in activity. Fixed OPEX stay the same in the near term, regardless of activity levels, while variable OPEX move in direct proportion to activity.

For fixed OPEX, project a constant amount in the near term (often with a small inflation adjustment or known planned changes, like a lease renewal or salary adjustments). Examples include rent, most salaries, and long-term insurance. For the forecasting approach, keep these costs as a steady baseline unless there are known changes, and adjust only for inflation or planned shifts.

For variable OPEX, forecast based on a driver that tracks activity. This means estimating a variable cost rate per unit of activity and multiplying by the expected activity level (or using a direct percentage of revenue for costs like commissions). Common drivers include revenue, units sold, or hours worked. The total variable OPEX is the variable rate times the activity, and the overall OPEX model becomes Fixed_OPEX plus Variable_rate times Activity.

In practice, this separation lets you model how costs respond to growth or contraction. If revenue rises, only the variable portion changes, while fixed costs stay put (though they may be revisited in longer horizons or with known changes). This is why the approach described aligns with the concept: fixed costs are constant in the near term, and variable costs scale with activity.