Will Kenton is an expert on the economy and also investing laws and regulations. He formerly held senior editorial roles at ptcouncil.net and also Kapitall Wire and also holds a MA in business economics from The new School for Social Research and Doctor of approach in English literature from NYU." data-inline-tooltip="true">Will Kenton
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Will Kenton is an professional on the economy and investing laws and regulations. He formerly held senior editorial roles at ptcouncil.net and Kapitall Wire and also holds a MA in business economics from The new School because that Social Research and also Doctor of philosophy in English literary works from NYU.

You are watching: Which of the following is the best example of a variable cost?


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Janet Berry-Johnson is a CPA through 10 years of suffer in public accountancy and writes around income taxes and small business accounting.
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What Is a variable Cost?

A variable price is a corporate price that changes in ratio to just how much a firm produces or sells. Variable prices increase or decrease depending upon a company"s production or sales volume—they climb as production increases and also fall as production decreases.


Examples of variable expenses include a manufacturing company"s costs of life materials and also packaging—or a retail company"s credit transaction card transaction fees or shipping expenses, which climb or fall with sales. A variable price can it is in contrasted v a addressed cost.


A variable cost is an price that transforms in relationship to production output or sales.When production or sales increase, variable costs increase; once production or sales decrease, variable expenses decrease.Variable expenses stand in comparison to solved costs, which perform not change in relationship to manufacturing or sales volume.

expertise Variable prices

The complete expenses occurs by any business consists variable and fixed costs. Variable prices are dependent on production output or sales. The variable expense of production is a consistent amount every unit produced. As the volume the production and output increases, variable costs will also increase. Conversely, as soon as fewer assets are produced, the variable costs connected with manufacturing will subsequently decrease.


Examples the variable costs are sales commissions, straight labor costs, expense of raw materials used in production, and also utility costs.


just how to calculate Variable prices

The full variable price is just the quantity of calculation multiplied through the variable expense per unit the output:


Variable prices vs. Fixed costs

Fixed costs are expenses that continue to be the same regardless of production output. Whether a firm makes sales or not, it have to pay its fixed costs, together these prices are elevation of output.


Examples the fixed expenses are rent, employee salaries, insurance, and office supplies. A company must still salary its rent for the room it rectal to run its service operations regardless of whether of the volume of commodities manufactured and also sold. If a service increased production or lessened production, rent will stay precisely the same. Return fixed prices can adjust over a period of time, the readjust will not be related to production, and also as such, fixed expenses are viewed as permanent costs.


There is additionally a classification of costs that falls in between fixed and also variable costs, known as semi-variable costs (also well-known as semi-fixed prices or combined costs). This are prices composed the a mixture that both fixed and variable components. Expenses are fixed for a set level of manufacturing or consumption and also become variable after this manufacturing level is exceeded. If no manufacturing occurs, a fixed price is frequently still incurred.


In general, carriers with a high relationship of variable costs relative to fixed expenses are thought about to be much less volatile, together their profits are much more dependent ~ above the success of their sales.


instance of a Variable cost

Let’s assume the it costs a bakery $15 to do a cake—$5 because that raw materials such together sugar, milk, and flour, and also $10 because that the direct labor connected in making one cake. The table listed below shows exactly how the change costs adjust as the number of cakes baked vary.


1 cake

2 cakes

7 cakes

10 cakes

0 cakes

Cost the sugar, flour, butter, and milk

$5

$10

$35

$50

$0

Direct labor

$10

$20

$70

$100

$0

Total variable cost

$15

$30

$105

$150

$0


As the manufacturing output of cakes increases, the bakery’s variable costs additionally increase. As soon as the bakery does no bake any cake, the variable costs drop to zero.


Fixed costs and also variable costs comprise the full cost. Total cost is a determinant that a this firm profits, which is calculate as:


Profits=Sales−TotalCosts\beginaligned &\textProfits = Sales - Total~Costs\\ \endaligned​Profits=Sales−TotalCosts​

A firm can boost its earnings by decreasing its full costs. Due to the fact that fixed prices are more complicated to bring down (for example, reduce rent may entail the company moving come a cheaper location), many businesses seek to minimize their variable costs. Decreasing costs usually way decreasing change costs.


If the bakery sells every cake for $35, its gross benefit per cake will be $35 - $15 = $20. To calculation the network profit, the fixed prices have to it is in subtracted native the pistol profit. Presume the bakery incurs monthly fixed expenses of $900, which consists of utilities, rent, and insurance, the monthly profit will look choose this:


Number SoldTotal change CostTotal solved CostTotal CostSalesProfit
20 Cakes$300$900$1,200$700$(500)
45 Cakes$675$900$1,575$1,575$0
50 Cakes$750$900$1,650$1,750$100
100 Cakes$1,500$900$2,400$3,500$1,100

A service incurs a loss when fixed costs are greater than pistol profits. In the bakery’s case, it has gross revenues of $700 - $300 = $400 once it sells only 20 cakes a month. Since its fixed expense of $900 is higher than $400, that would lose $500 in sales. The break-even point occurs once fixed expenses equal the pistol margin, resulting in no earnings or loss. In this case, when the bakery sells 45 cakes for full variable expenses of $675, it division even.


A company that seeks to rise its profit by diminish variable costs may require to cut down top top fluctuating costs for life materials, straight labor, and also advertising. However, the cost cut need to not influence product or service quality as this would have an adverse effect on sales. By reducing its variable costs, a organization increases the gross benefit margin or contribution margin.


The contribution margin enables management come determine exactly how much revenue and also profit have the right to be earn from each unit of product sold. The donation margin is calculation as:


ContributionMargin=GrossProfitSales=(Sales−VC)Saleswhere:VC=VariableCosts\beginaligned &\textContribution~Margin = \dfracGross~ProfitSales=\dfrac (Sales-VC)Sales\\&\textbfwhere:\\&VC = \textVariable Costs\\ \endaligned​ContributionMargin=SalesGrossProfit​=Sales(Sales−VC)​where:VC=VariableCosts​


The donation margin for the bakery is ($35 - $15) / $35 = 0.5714, or 57.14%. If the bakery reduce its variable prices to $10, its donation margin will increase to ($35 - $10) / $35 = 71.43%. Profits rise when the contribution margin increases. If the bakery to reduce its variable price by $5, it would earn $0.71 for every one dissension in sales.


Common examples of variable prices include costs of goods sold (COGS), life materials and also inputs to production, packaging, wages, and also commissions, and specific utilities (for example, electrical energy or gas that increases with manufacturing capacity).


Variable costs are straight related come the price of manufacturing of items or services, when fixed expenses do no vary with the level of production. Variable expenses are commonly designated as COGS, vice versa, fixed costs are not usually contained in COGS. Fluctuations in sales and also production levels can impact variable prices if determinants such as sales commissions are included in per-unit production costs. Meanwhile, fixed prices must still it is in paid also if production slows under significantly.


If suppliers ramp up production to meet demand, your variable prices will increase as well. If these expenses increase in ~ a price that over the profits produced from new units produced, it might not make sense to expand. A agency in together a case will should evaluate why that cannot attain economies of scale. In economic situations of scale, variable prices as a percent of overall cost per unit decrease as the scale of production ramps up.

See more: Which Of The Following Sentences Contains A Dangling Modifier ?


No. Marginal cost refers to just how much it costs to develop one additional unit. The marginal expense will take right into account the complete cost of production, consisting of both fixed and also variable costs. Because fixed expenses are static, however, the load of fixed costs will decline as production scales up.