What is a Variable Cost?
Lesson Description DESCRIPTION In this lesson students will learn that at certain times all entrepreneurs have some fixed costs that must be paid no matter how many products are offered for sale. Variable costs change with the number of products offered for sale. By identifying and controlling their costs, entrepreneurs are better able to earn a profit and be successful. READING Anyone who runs a business knows that some costs must be paid no matter how many products are offered for sale. For example, Alex owns a shoe store. He must pay his property taxes whether he sells 20 or 200 pairs of shoes each day. Mortgage payments (payments on the loan he took out to buy his building) must be made to the bank. Fire insurance, the lease on a delivery truck, and installments on a remodeling loan are other examples of costs Alex must pay regardless of sales. Expenses that must be paid no matter how many goods or services are offered for sale are called fixed costs. Other types of costs change wi
Variable costs are expenses that may change from one instance to the next, based on several different factors. Just about every household and business experiences some type of debt obligations that involve a variable cost. Unlike a fixed cost, a variable cost can be much more difficult to budget, and may at times exceed the limits of the budget when the variable cost is related to an unexpected expense. One of the easiest ways to understand a variable cost is by applying the principle to the household utilities. Each monthly billing cycle will reflect a different amount due. The variance in the monthly charge is directly related to the amount of service utilized by the household during the billing period. For example, the power bill may be relatively low one month, owing to the fact that the home required little in the way of heating or cooling. However, the next period included several days that were extremely cold. The household required more electricity to maintain a comfortable tem
