myz-vgb.ru A Business Encyclopedia

Variable Cost

Definition: The Variable cost is the cost proportionally related to the level of output, i.e. it increases with the increase in the production and contracts with the decrease in the total output. Simply, the cost which varies with the change in the total output is called the variable cost.

The most common form of variable costs is raw material, direct labor related to the level of output, sales commission, and the cost of all other inputs that vary with the total production. For example, if the company pays 3% sales commission for every sale made by the salesperson, then 3% is the variable cost which varies with the change in the sales volume.

The variable costs and Fixed costs together make up the total cost of the firm. Symbolically,

Total Cost = Fixed Cost + Variable Cost

The company with the higher proportion of variable costs than the fixed costs can generate higher profit margins, even at low sales. But, however, as the sales increase the profit margin generated will be less than that would have been generated with the higher fixed cost. Thus, the variable cost is essential for projecting the profits of the firm and calculating the break-even point of the business or project.

Also, the higher variable costs encourage the new entrants to enter the market, thereby increasing the competition.

Leave a Reply

Your email address will not be published. Required fields are marked *

Shares

Related pages


target return pricingfiedler contingency theory of leadershipphysiological definition psychologyimportance of ethnocentrismdefine sales forecastingmotivator hygiene theorycessation defhrm definationprofit push inflation definitionadvantages of preparing a cash budgetbusiness process reengineering definitioninventory turnover ratio analysis interpretationjohari window feedbacksemantic barriersunitary elastic demand exampleone example of informal communication isdividend decision in financial managementvalue chain analysis michael portermeaning of regression in hindidefine promotional mixfive porters modelholistic meaning in urduresonant definestatistical methods of demand forecastingarbitrage meansstructural unemployment meaningwhat are the determinants of price elasticitythe nominal group techniquemoratorium bankmeaning of external commercial borrowingthe dialectic methodclassical conditioning theory of ivan pavlovwhat is markup in accountingsaving certificatesdefine vamrecurring deposit wikidefinition sole proprietorshipcorrelative analysisexchange rate defdefinition monopolistic competitionreasons for expansionismquick ratio acid test ratioproduct or market expansion gridneft batcheseconomics arbitragemeaning of marketing segmentationformal communication meaningcobranding definitionpromotion mix marketingreturn on networth ratio formuladefine lockboxdifference between demat account and trading accountpublicity definition marketingless elastic demand meansdefintion of autocraticdifference between lessee and lessorjohati windowopen market operations of rbitheory of ivan pavlovbank draft meaningmeaning of elasticity of demand in economicsdefinition sole proprietorshipstrategic hr planning processconcentric diversification strategy examplespolycentric pricing strategymeaning of judgementaldefine ppfmeaning of guerrilladiversification definition economicsdefine utilordinal approach in economicsperfectly competitive market structurekanban bins