Explain why fixed and variable costs factor into the profitability of carrier operations. Be specific and use an example
Business operations are often described as costing “fixed” or “variable.” This means that a business may be able to reduce its fixed costs by reducing output, while it can’t change its variable costs. However, there’s more to this than meets the eye! Let’s take a look at some of the factors involved in calculating how much an operation spends on fixed and variable costs:
Fixed costs are those that are not affected by the volume of output. They do not change in proportion to the number of units produced, nor do they fluctuate with changes in hours worked or employees. Fixed costs include:
Variable costs are the costs that change with the volume of output. They include labor, materials and other direct costs.
Variable costs can be reduced by increasing production levels. For example, if you produce more units than your normal capacity then you can reduce your variable cost per unit by reducing the number of workers needed to produce these additional units.
Total cost is a combination of fixed and variable costs. Fixed costs are those that remain constant regardless of the volume of output while variable costs can be reduced by increasing production or sales.
The total cost to produce one unit of product A at $10 per unit is defined as:
Total Cost = $10 Fixed + Variable + Interest on Capital Intangible Asset (e.g., IP)
$10 Fixed Cost = Depreciation on Equipment Costs
Fixed costs are not affected by the volume of output. For example, if you have a fixed cost for paying your employees and they are paid every month regardless of how many hours they work, then a large number of employees will mean that you must pay more to cover their salaries each month. However, if these employees worked fewer hours each week or if there were fewer total employee hours per week, then your fixed costs would not increase as fast since fewer people would be working (and thus needing paychecks).
Variable costs also change with level of output—but in this case it’s because some variable expenses go up and down as demand increases or decreases (for example: utility bills).
We hope you’ve enjoyed this article and learned more about how to manage the profitability of carrier operations. We know that the world of logistics is different than other sectors, and we want to help our customers succeed in their own unique ways. So if you have any questions or concerns, please contact us!
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