A variable cost is an expense that rises and falls in direct proportion to how much a business produces or sells, such as raw materials and shipping.
Variable costs change with output: sell more and they rise, sell less and they fall. Typical examples are raw materials, direct labour paid by the unit, packaging, shipping and payment processing fees. They contrast with fixed costs that stay constant regardless of volume.
The gap between a product's price and its variable cost per unit is the contribution margin, the amount each sale contributes toward covering fixed costs and then profit. Understanding variable costs is essential for pricing, break-even analysis and deciding whether an additional order is worth taking.
Each product a company sells costs $6 in materials and shipping (variable) and sells for $10. The $4 contribution margin per unit goes toward covering fixed costs, and then to profit once those are met.
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