Fixed Costs vs Variable Costs

Fixed costs

Fixed costs don't change with the volume of sales (at least in the short term). Whether you sell 50 units or 500, the rent is the same. Common fixed costs:

• Rent
• Salaries of permanent staff
• Insurance
• Software subscriptions
• Loan repayments

Variable costs

Variable costs go up when you sell more and down when you sell less. Each extra sale generates an extra cost:

• Raw materials and ingredients
• Packaging
• Per-order shipping
• Payment processing fees
• Hourly contract labour for production

Why the split matters

• It powers your break-even calculation.
• It tells you which costs to attack first when sales drop (fixed ones are harder to cut quickly).
• It determines your contribution margin per sale.

Practical example

A small bakery, per month:

• Fixed: $3,000 rent + $1,500 salary + $200 insurance = $4,700
• Variable: $1.50 per loaf in ingredients × 2,000 loaves = $3,000
• Total monthly costs at 2,000 loaves: $7,700
• If sales drop to 1,000 loaves, variable cost halves to $1,500, but fixed cost stays $4,700 → total $6,200

Notice that costs don't drop in proportion to sales — that's the danger of heavy fixed costs.

Common mistakes

• Treating "semi-variable" costs as one or the other. Utility bills often have a fixed base plus a usage component.
• Assuming fixed costs are forever fixed. They're fixed in the short run — over time, you can renegotiate, move, or restructure.