Variable and Fixed Costs? There Are Plenty

¶ … variable and fixed costs?

There are plenty of differences between 'fixed costs', and 'variable costs'. While variable costs are those that can be varied according to the changes taking place, fixed costs are those costs of investment goods that are used by the firm or company, with the idea that it would only be through wearing them out by way of the production of goods or by services for sale that they can eventually be recovered, in the long-term. (Fixed and variable costs: William-King) This means that the basic lesson for all entrepreneurs is that all entrepreneurs generally have some basic fixed costs that must be paid, no matter how many products they would be offering for sale, while at the same time, variable costs change according to the number of products that are being offered for sale. It is through a learned process of identification and control of their costs that all entrepreneurs would be able to earn a basic profit for their company, and thereby earn success in their chosen field. If one example were to be taken, it can be said that one Alex runs a shoe store, and he would have to pay certain fixed costs, whether or not he sells twenty pairs, or two hundred pairs of shoes everyday. These costs would be, for example, mortgage payments, insurance, and so on. Alex would also have to pay his sales people, use raw material, use electricity, and maintain an inventory. (How Can Entrepreneurs Control Costs?)

All these costs would change every period of time, and these would then be the variable costs. Fixed costs must certainly be paid, and this is perhaps the reason that they are known as 'sunk costs', because they would be beyond anyone's control at various points of time during the running of the business. Therefore, while Alex may choose the number of sales people that he hires, he would not be able to choose the amount of rent that he has to pay every month. The best way, which almost all entrepreneurs use, is to increase their sales, so that they may be able to reduce the amount of fixed costs that were paid per item that was sold. This is the reason that many gas stations, have, over recent years, also become convenience stores, and if the entrepreneur would be able to sell more items and thereby increase the volume of his sales, under the same roof, then he will most definitely do so, so that he may be able to enjoy more profits from his business. However, one must remember the fact that this approach may not work all the time, and the discerning entrepreneur must always keep track of his variable costs. (How Can Entrepreneurs Control Costs?)

2. What are some examples of fixed and variable costs from your workplace?

It is a fact that in an analysis of a business, almost all the costs of the business will fall under either variable or under fixed costs. Examples of variable costs in the workplace would more often be the costs of the goods that have been sold, the sales commissions given to the sales staff of the business, shipping charges, if the product is being shipped elsewhere, the delivery charges that usually vary depending on the distance to be covered, the various costs of materials and supplies, the wages or salaries that would have to be paid to the employees of the concern, whether they are part time or full time staff, and the costs that are incurred by the company when they offer sales commissions or bonuses as incentives to their staff. However, fixed costs being what they are, seldom vary, and examples of this type of costs would be the rent to be paid, the interest to be paid on debts, expenses on insurance, costs for the plant or other equipment, the expenses incurred for procuring business licenses, and the salaries to be paid for certain full time and permanent employees of the company. (Fixed and Variable Costs: Business Owners Toolkit)

There are, in addition to fixed and variable costs, certain costs while running a business enterprise, which are a combination of both variable and fixed, and these costs are known as 'combination costs'. These are in general, a combination of both fixed and variable, and would be incurred by any enterprise, regardless of the volume of sales; in fact, the costs often rise in proportion with the volume of sales. (Fixed and Variable Costs: Business Owners Toolkit) In general, the fixed and the variable costs must be analyzed before arriving at a 'breakeven' limit, wherein the amount of sales volume that a business needs in order to break even or to start making a profit can be arrived at, and for this requirement, a practical formula is utilized. This is, fixed costs, divided by revenue per unit minus variable costs per unit. For example, if the fixed costs for manufacturing 100,000 widgets were $30,000 per year, and the variable costs had been analyzed and decided at $2.20 materials, $4.00 labor, and $0.80 overhead, making a total of $7.00, then if the selling price for one single widget was decided as $12, then, $30,000 divided by, or in other words, $12.00-7.00, equals 6000 units. This would therefore be the number of widgets that would have to be sold for $12.00, before the business would be able to make a profit or break even. (Small Business Canada: Breakeven Analysis)

3. How do changes in fixed costs and variable costs impact the contribution margin?

The Unit Contribution Margin is the basic difference between the product's per unit selling price and the unit variable cost. Therefore, the contribution margin can be defined as being the unit sales price - the unit variable cost. If, for example, the unit contribution margin, for watches were to be $20.00 - $10.00, then the Unit Contribution margin would be $10.00. (Bean Counter, Break-even analysis) It is therefore clear that there is an innate relationship between sales, variable costs, fixed costs, and profits, and these can be used to study the effects they have on the contribution margin. For example, if a company were to sell 1000 products for $1,000 each, then the total sales for that particular period would be $100,000. When the company had to sell 1000 products, it would have had to doubtless incur several variable costs, such as for the payment of raw material used in the production of the products, the energy used for the same, and the costs of direct labor may total up to $600,000. Then the basic difference between the sales income and the variable costs becomes the contribution margin. (Six Sigma and the Bottom Line)