Variable Costs

What Are Variable Costs?

Variable costs rise and fall with your business output. If you make more products, you use more materials. If you ship more orders, you pay more for shipping. If your salespeople close more deals, they earn more in commissions. This direct relationship between activity and cost is what makes them variable.

For example, a t-shirt printing company has variable costs including blank shirts ($5 each), ink ($1 per shirt), packaging ($0.50 per shirt), and shipping ($4 per order). If they sell 1,000 shirts, variable costs are $10,500. If they sell 2,000 shirts, variable costs double to $21,000.

Why It Matters for Your Business

Variable costs directly impact your margins and determine how profitable each additional sale is.

• Contribution margin: Selling price minus variable cost per unit gives you the contribution margin, which is the amount each sale contributes toward covering fixed costs and generating profit.
• Break-even analysis: Combined with fixed costs, variable costs per unit determine exactly how many units you need to sell to break even.
• Scaling economics: If you can reduce variable costs through volume discounts, better suppliers, or process improvements, every sale becomes more profitable.

A business with high variable costs and low fixed costs is naturally more flexible during downturns because expenses decrease with sales. However, it also means margins stay thin even as the business grows, unless you find ways to lower per-unit variable costs.