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Related to Variable costs: direct costs, Semi Variable Costs
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To understand flexibility within a budget, one must understand the two components of cost: fixed cost and variable cost.
In a manufacturing firm such as Bob's Bicycles, variable costs include direct materials, direct labor, variable manufacturing overhead, and the variable portion of selling and administrative expenses.
Depending on the prior output level, even a small increase in FC, depending on the slope of the TR function, with no change in unit variable costs for simplicity, would require a management decision to increase output, demand permitting, to avoid losses or to maintain desired profits.
The front end of the origination business is also a good place to have a variable cost structure in place.
You will also find that variable costs change as volume increases.
As well as averaging less than a third of the fixed cost bill in both cases, variable costs varied far less between the best and worst performing businesses, suggesting markedly less potential for improvement
Under a PAVC standard for competitive pricing, no generator would be built; in any market, competitive or not, even the most expensive "marginal" generator has to expect that prices will, on average, cover not just its variable costs but also its fixed capital costs.
Transfer Price = Variable costs per unit + Lost contribution margin per unit
A substantial portion of risk borne by any manufacturer derives from operating leverage: that is, the use of fixed cost investment to lower variable costs.