I know for myself running a cleaning business and another small business on E-Bay all my cost must be paid no matter how many products I have to offer for sale.
For my business on E-Bay I sell recipe cards and with that I must pay all sales tax on anything I sell. I must pay rent on building out back that I use for an office.
Along with insurance and any other loans I might have, that have to do with the business (like a business line of credit).
It doesn’t matter how much I sell these bills are called fixed costs and must be paid. My variable costs include any of my wages, raw materials, electric power to run all my printing machines.
And what ever it takes to maintain my inventory.
If I decide to offer more types of recipe cards/ make recipe boxes and kitchen items, I will need to hire more people to stock and sell these items.
My inventory costs will grow as well as my shipping costs for any products that I either buy or send to customers. These are all examples of variable costs.
My company needs to understand the important differences between fixed and variable costs and how these differences affect a firm’s success. Fixed costs must be paid.
Sometimes they are called “sunk costs” because at the present they are beyond the control of my company.
If I signed a lease for my store that requires an $800.00 payment each month, then I must make the payment no matter how many products I sale.
The only costs my company has immediate control over are variable costs.
The fact that my company cannot change their fixed costs at the present does not mean they should ignore them.
Fixed costs are generally paid out of the money earned from our company sales. If my company can sell more products to earn more money, the fixed costs will be a smaller part of income.
Entrepreneurs often try to increase their sales to reduce the amount of fixed costs paid per item sold. This explains why many gas stations have become convenience stores in recent years.
If the owner has to pay to have a building and someone there to help customers, it doesn’t cost much more to sell milk and bread, too. As the result of selling other products, total sales increase.
This reduces the amount of fixed costs that must be paid out of each dollar of sales, thus increasing profit (Practical advice for business. (2007).
Although it is possible to improve a firm’s profitability by offering more types of prod-ucts, there is no guarantee this approach will always work.
Entrepreneurs must keep track of their variable costs. Suppose the owners of a store spent an extra $250 a week to offer fresh lettuce and other produce for sale.
If they sold only $150 worth of the produce, they would lose $100 because the amount earned in sales is not sufficient to pay the variable costs of stocking the fresh vegetables and fruit. An entrepreneur should never offer a product for sale that cannot pay for its variable costs.
Entrepreneurs need to understand the difference between fixed and variable costs.
They should realize that the profit per item can be increased when more products are sold because the fixed cost per item is less.
Steps to limit the amount of fixed costs a firm is responsible for often improve its chances for success.
Are some mixed costs unable to be segregated into fixed and variable components?
Other businesses have attempted to avoid fixed costs so that they can maintain a more stable stream of income relative to sales.
For example, a computer company might outsource its tech support. Rather than having a fixed staff that is either idle or overloaded at any point in time, they simply pay an independent support company a per-call fee.
The effect is to transform the organization’s fixed costs to variable, and better insulate the bottom line from fluctuations brought about by the related ability to cover or not cover the fixed costs of operations (Principles of Accounting.. (n.d.).
Practical advice for business. (2007). Price your product or service Covering fixed and variable costs.
Retrieved Dec. 9, 2007, from http://www.businesslink.gov.uk/bdotg/action/detail?type=RESOURCES&itemId=1073790696
Principles of Accounting.. (n.d.). Chapter 18 Cost-Volume-Profit and Business Scalability.
Retrieved Dec. 9, 2007, from http://www.principlesofaccounting.com/chapter%2018.htm
I get to go to vo all day tomorrow we are having a cooking composition