Fixed and variable costs are both incurred by businesses. When production levels fluctuate, variable costs don’t stay the same. Fixed costs, on the other hand, are costs that do not change regardless of production levels. It’s essential to know which costs are variable and which are fixed while making business decisions.
A variable cost fluctuates based on how much the organization generates or sells. Variable costs rise or fall as a firm’s sales and production volume increase or decline. Variable costs go up as production increases and consequently, as a result of fewer products being produced, the variable costs associated with production fall.
Variable costs are expenses that fluctuate in relation to the volume of products or services provided by a company. They are, in other words, costs that change based on the amount of activity. Variable costs fluctuate depending on how many products or services are produced. The lower the profit margin, the more variable costs there are.
Small businesses with high variable costs differ from those with high fixed costs, such as insurance and rent, which do not fluctuate with income or production. Companies with high variable costs must generate less to break even, but their profit margins are lower than those with high fixed costs. As there is less investment required to start up, industries with high variable costs, such as the service industry, which relies primarily on labor, are far more vulnerable to competition.