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Simple English definitions for legal terms
variable cost
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A quick definition of variable cost:
A variable cost is a cost that changes depending on how much of a product or service is being produced. For example, if a company makes more products, they will have to spend more money on materials and labor. This is different from a fixed cost, which stays the same no matter how much is produced. Variable costs can be important for businesses to understand because they can affect how much profit they make.
A more thorough explanation:
Variable cost is a type of cost that changes depending on the level of production or business activity. This means that as production increases, variable costs also increase, and as production decreases, variable costs decrease as well.
For example, if a company produces 100 units of a product, the variable cost may be $10 per unit, resulting in a total variable cost of $1,000. If the company decides to produce 200 units, the variable cost may increase to $12 per unit, resulting in a total variable cost of $2,400.
Variable costs can include expenses such as raw materials, labor, and shipping costs. These costs are directly related to the production or sale of a product or service.
Understanding variable costs is important for businesses because it helps them determine the break-even point, which is the level of production at which total revenue equals total costs. By knowing the variable cost per unit, a business can calculate the break-even point and make informed decisions about pricing and production levels.