Why does variable cost change

This also means that the relationship of variable costs to production output is linear. If volume doubles, then variable costs also double. Average unit cost is the sum of average fixed cost per unit and the average variable cost per unit. Larger production runs allow a producer to allocate fixed costs over a greater number of units, thereby reducing the average fixed costs associated with each unit. Examples of variable costs include the materials used directly in production, some types of labor, transportation, materials ordering costs, and packaging supplies.

Variable costs include credit card fees and shipping costs. Companies with high variable costs need to produce less to break even but they also have lower profit margins than companies with high fixed costs, according to Business Dictionary. Variable costs change based on how many goods are produced or services provided. The more variable costs, the lower the profit margin. Industries with high fixed costs, like airlines, are less vulnerable to competition. They require huge amounts of investment in machinery and other physical items to start up.

Industries with high variable costs, like the service industry, that depends heavily on labor, are much more vulnerable to competition because there is less investment required to start up. A business consultant has many variable costs because she does many different types of contracts that incur their own specific expenses. On one project, she has to pay for research.

She also has to travel to visit the client and the cab fare is a variable expense. She pays an assistant hourly to help her and this billable labor is also a variable cost. On another project, she needs to travel out of state and all her travel expenses are variable costs.

She rents a t emporary office to do her work. She buys new software to suit the particular project and she takes a course online to learn the new software. She has to borrow money to buy the new software and finance the training and the interest on that loan is a variable cost as well.

Hours worked vary depending on the volume of orders. Shipping costs are a big variable cost for this business. The business has a salesperson who gets commission and a performance bonus. Corporate Finance. Actively scan device characteristics for identification. Use precise geolocation data. Select personalised content. Create a personalised content profile.

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Table of Contents Expand. Fixed Cost vs. Variable Cost. Marginal Cost of Production. Key Takeaways Marginal cost of production refers to the additional cost of producing just one more unit.

Fixed costs do not affect the marginal cost of production since they do not typically vary with additional units. Variable costs, however, tend to increase with expanded capacity, adding to marginal cost due to the law of diminishing marginal returns. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation.