For businesses, which example of variable costs has the greatest impact?

If you are an entrepreneur or a business executive, you might have wondered why some cost reductions are so difficult while others can be adjusted up or down according to demand. This is because there are two fundamentally different types of costs in a business: (Fixed Cost) and (Variable Cost). Understanding the difference between these two is not just theoretical knowledge but a key to making decisions on investment, pricing, production planning, and protecting the long-term financial stability of your business.

What are Variable Costs and Why Do They Become a Problem as the Business Grows

Before discussing fixed costs, let’s understand what Variable Costs (Variable Costs) mean. They are expenses that change in proportion to the level of production or sales. When your sales increase, variable costs will increase accordingly, and when sales decrease, variable costs will decrease as well.

Clear Examples of Variable Costs

The most prominent examples of variable costs include:

• Raw materials and production components: If you produce 100 units, you need a certain amount of raw material X; if you produce 200 units, the raw material needs to double.
• Direct labor wages: Employees paid by the hour or based on output will have wages that increase proportionally.
• Packaging and shipping costs: The more products you sell, the higher the packaging and delivery expenses.
• Energy costs for manufacturing: The more machinery you operate, the higher your electricity bills.
• Sales commissions and incentives: Sales teams paid based on sales volume.

Key Point: Variable costs are more flexible. Businesses can reduce these expenses if market demand drops, but this requires careful management to ensure profit per unit remains high.

What are Fixed Costs and Why Are They Unavoidable

Fixed Costs (Fixed Cost) are expenses that a business must pay regardless of whether it produces or sells more or less. They are incurred whether the business is operational or not.

( Characteristics of Fixed Costs

Fixed costs have properties that make them a critical focus in business management:

• Unchanged by production volume: Whether you sell 10 units or 1,000 units, rent and other fixed expenses stay the same.
• Must be paid even if the business halts temporarily: If operations are paused for maintenance, fixed costs still flow out.
• Impact on break-even point: Companies with high fixed costs need to sell enough to cover these costs before making a profit.

) Examples of Fixed Costs in Business Operations

• Rental expenses: Office, warehouse, or production space rent per month or year.
• Salaries of permanent staff: Full-time employees or contractual staff with fixed wages.
• Business insurance: Asset insurance, executive liability, and liability insurance.
• Depreciation of assets: Machinery, equipment, buildings calculated on a monthly or annual depreciation basis.
• Loan interest: Businesses borrowing funds for expansion pay interest regularly.
• Management and support staff salaries: Salaries for management, accounting, HR personnel.

How Variable Costs Influence Pricing Decisions

When setting product prices, you must first consider variable costs. For example:

If you produce shirts with a variable cost of 80 baht per piece ###including raw materials, labor, and packaging###, and your fixed costs are 50,000 baht per month (factory rent, fixed salaries),

To achieve a 50% profit margin per unit, the selling price must be 80 + (80 × 50%) = 120 baht. Then, you need to sell at least 50,000 ÷ 40 = 1,250 units per month to cover fixed costs.

This illustrates why managing variable costs is critical for competitiveness.

Main Differences Between Fixed and Variable Costs

How to Analyze Your Business Cost Structure

Successful business management depends on understanding where costs flow. When you combine fixed and variable costs, you get an overall picture of total operating costs.

( Analysis Steps

1. Identify all fixed costs: Gather expenses that remain constant monthly or yearly.
2. Calculate variable costs per unit: Determine expenses incurred per product or sale.
3. Calculate break-even point: Use the formula: Break-even = Fixed Costs ÷ (Selling Price - Variable Cost per Unit).
4. Assess sensitivity: Analyze how changes in volume affect profit.

) Benefits of This Analysis

• Investment decisions: Know whether investing in machinery ###increases fixed costs( will reduce variable costs.
• Pricing strategies: Set selling prices that cover both cost types.
• Production planning: Expand or reduce production based on market conditions.
• Revenue control: Determine the minimum sales needed to avoid losses.

Cost Control Strategies to Increase Profitability

) Reduce Variable Costs

• Negotiate with suppliers: Long-term relationships and bulk purchasing can lower raw material prices.
• Improve production efficiency: Use new technology or optimize processes to reduce waste and errors.
• Choose optimal logistics: Select cost-effective shipping options.

Manage Fixed Costs Wisely

• Reduce, optimize, or eliminate: Review whether all fixed costs are necessary; some can be increased or renegotiated.
• Use shared assets: Instead of buying expensive machinery, consider leasing or outsourcing (outsourcing).
• Cut support costs: Improve administrative processes or automate using software to save resources.

Summary: Why Understanding Costs Is Crucial

Understanding the difference between ###Fixed Cost### and (Variable Cost) is not just an accounting exercise but a way to unlock better business decision-making.

Successful businesses know which costs to reduce for careful management and which are long-term investments for growth. With this understanding, even if the market fluctuates or competition intensifies, your business can remain stable and flexible. This is the formula for overcoming obstacles and growing sustainably in the long run.