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What is a Variable Cost?

A variable cost is an expense that changes in proportion to how much a business produces or sells. Raw materials, packaging, shipping and sales commissions are typical examples. When output is zero, variable costs are zero; when output doubles, they roughly double too.

Variable costs are the direct, per-unit cost of making and delivering a sale. A bakery's flour, packaging and card-payment fees are variable because they exist only when a loaf is made and sold. This is the opposite of fixed costs like rent, which are paid regardless of volume.

The gap between a product's selling price and its variable cost is its contribution: the amount each sale puts toward covering fixed costs and then profit. Tracking variable costs accurately is therefore essential to pricing, because a product priced below its variable cost loses money on every unit sold, no matter how many are sold.

Example

A furniture maker's variable cost per table is €120 of timber and fittings plus €30 of delivery, or €150 total. Selling a table for €400 leaves €250 of contribution toward fixed costs and profit. If the maker sells no tables, those €150 costs do not occur at all.

Questions

What is the difference between variable and fixed costs?

Variable costs move with output, like materials and shipping; fixed costs stay the same, like rent and salaries. The mix of the two determines a business's break-even point and operating leverage.

Why are variable costs important for pricing?

Because the price minus the variable cost is the contribution that covers fixed costs and profit. A price below variable cost loses money on every sale, so knowing variable cost is the floor beneath any pricing decision.

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