variable cost

Examples of variable cost in the following topics:

• Working capital analyses

  • A break even analysis is designed to show you how much revenue must be generated to cover your fixed and variable costs.
  • To conduct your breakeven analysis, take your fixed costs, divided by your price minus your variable costs.
  • Once you have reached that point, you have recovered all costs associated with producing your product (both variable and fixed).
  • Above the breakeven point, every additional unit sold increases profit by the amount of the unit contribution margin, which is defined as the amount each unit contributes to covering fixed costs and increasing profits.
  • Recording this information in a spreadsheet will allow you to easily make adjustments as costs change over time, as well as play with different price options and easily calculate the resulting breakeven point.

• Break-Even Analysis

  • If they are not able to currently, adjusting other variables may help them reach this goal.
  • For instance, reducing fixed costs (finding a building with cheaper rent), reducing variable costs (finding a cheaper supplier for table-making goods), and/or increasing the price of their tables.
  • Try reducing their fixed costs (e.g., by renegotiating rent, or by better controlling utility telephone bills or other costs)
  • Try reducing their variable costs (the price paid for the tables by finding a new supplier)
  • To do this, draw the total cost curve (TC in the diagram), showing total cost associated with each possible level of output; the fixed cost curve (FC), showing costs that do not vary with output level; and finally, the various total revenue lines (R1, R2, and R3), showing the total amount of revenue received at each output level given the chosen price point.

• Cost-Based Pricing

  • Cost-based pricing involves calculating the cost of the product, and then adding a percentage mark-up to determine price.
  • Information on demand and costs is not easily available, and managers have limited knowledge as far as demand and costs are concerned.
  • Cost-plus pricing is the simplest pricing method.
  • This appears in two forms: the first, full cost pricing, takes into consideration both variable and fixed costs and adds a % markup.
  • The other is direct cost pricing, which is variable costs plus a % markup.

• Profitability analyses (e.g. by customer, product, region)

  • Although this is a natural consequence of variability in profitability across customers, firms benefit from knowing exactly who the best customers are and how much they contribute to firm profit.
  • "The biggest challenge in measuring customer profitability is the assignment of costs to customers.
  • So, accountants try and develop some sort of reasonable method of allocating fixed and variable costs to customers.
  • On-line customers could have the costs of developing and maintaining the website allocated to them.
  • In this case, cost of goods sold is substituted for "allocated costs" in column three of Exhibit 40, and column four will show gross margin by customer instead of profitability by customer.

• Developing Products

  • You might base your initial per-camera pricing on what it costs to hire a nighttime security agency to guard an equivalent area.
  • Value: If there is insufficient information available about comparables (e.g., because the new products are truly breakthrough in nature), then you can try to discover what your ideal customers are currently paying to satisfy the need your new product fulfills, or what it is currently costing them by failing to satisfy the need.
  • You might base your initial per-camera pricing on what it costs to hire a nighttime security agency to guard an equivalent area.
  • You may be able to extract value from customer surveys by asking them about the nature and annual costs of the problems that your new product addresses and how much it currently costs them to either solve or make do without a solution.

• Causes of the bullwhip effect and counteracting the bullwhip effect

  • This behavior tends to add variability to quantities ordered and uncertainty to forecasts.
  • Eliminate order batching by driving down the costs of placing orders, by reducing setup costs to make an ordered item, and by locating supply chain members closer to one another to ease transportation restrictions.
  • Such actions remove price as a variable in determining order quantities.

• Solar cell facts

  • Virtually no other costs accrue.
  • Solar cells reduce a business's impact on the environment, cut its electricity costs, and send a positive message to the public about the business's commitment to clean and sustainable practices.
  • Most solar voltaics have efficiency variables of between 5% and 17%.

• The Meaning of Price

  • For example, an item of clothing will cost a certain amount of money.
  • " could be phrased as "How much does it cost?
  • " price and cost are two different things.
  • Other common perceived costs include risk of making a mistake, related costs, lost opportunity, and unexpected consequences.
  • Price has also become a variable society employs to control its economic health.

• Budgets, forecasts, and alternative scenarios

  • In that case, we can expect costs to return to normal when the repair work is completed.
  • It is quite another thing if costs are higher because the electric company raised its rates.
  • In that case, we can expect that costs will be at least 20 per cent higher in the future.
  • A manager might ask for an alternative scenario where sales increase by 12 per cent and costs increase by 9 per cent and another scenario where sales decrease by 3 per cent and costs increase by 1 per cent.
  • Last year, rattled by financial-market turmoil, they included an extremely pessimistic sales outlook and outlined potential cost cuts.

• Creating a Budget

  • ., sales, selling expenses, advertising costs) is calculated.
  • In that case, we can expect costs to return to normal when the repair work is completed.
  • It is quite another thing if costs are higher because the electric company raised its rates.
  • In that case, we can expect that costs will be at least 20% higher in the future.
  • The focus is on variables, inputs and outputs, drivers and the like.