It costs you $60 which is the variable cost and you sell it for $100 (this is the price).
If you sell 100 widgets (the quantity) the variable costs will be $6,000 and if you sell 50 widgets the variable cost is only $3,000. It varies directly with your sales volume (or quantity).
Now, if you sell a widget for $100 and it costs you $60, then you've made a profit of $40 on each sale... displayed 300 characters
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It varies directly with your sales volume (or quantity).
Now, if you sell a widget for $100 and it costs you $60, then you've made a profit of $40 on each sale. This is the gross profit or gross margin.
But you still have to pay your fixed costs to end up with your net profit.
If your fixed costs for expense items such as rent, leases, insurances etc are $3,000 and you sell 100 widgets and make a gross margin of $40 on each one, then your total gross margin is $4,000 and after deducing your fixed costs of $3,000, you will end up with a "net profit" of $1,000... displayed next 300 characters
The fixed costs will be incurred anyway, and in the short term they should be disregarded. In making these decisions, the variable costs provide a good measure of the differential costs that need to be assessed...
Why, is this, a variable cost? It is a variable cost because it changes according to the level of cost-driver. The cost of the Item: Building Rent is a fixed cost that is not immediately affected by changes in the cost-driver level...
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