Variable costs are the expenses that change in proportion to the volume of production or sales. They increase as the output increases and decrease as the output decreases. Examples of variable costs include raw materials, labor, utilities, commissions, or distribution costs.
Variable costs are important to understand because they affect the profitability and break-even point of a business. To calculate the total amount of variable costs for a given level of output, we need to know two things: the variable cost per unit and the number of units sold.
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Variable Cost Per Unit
The variable cost per unit is the amount of variable expenses incurred for each unit of output. It can be calculated by dividing the total variable costs by the total quantity of output. For example, if a company spends $50,000 on variable costs to produce 10,000 units, then the variable cost per unit is:
Variable cost per unit = Total variable costs / Total quantity of output Variable cost per unit = $50,000 / 10,000 Variable cost per unit = $5
This means that for every unit produced, the company incurs $5 of variable costs.
Number of Units Sold
The number of units sold is the quantity of output that is sold to customers. It can be obtained from the sales records or forecasts of the business. For example, if a company sells 8,000 units in a month, then the number of units sold is 8,000.
Total Variable Costs for 8,000 Units Sold
To calculate the total amount of variable costs for 8,000 units sold, we simply multiply the variable cost per unit by the number of units sold. For example, if the variable cost per unit is $5 and the number of units sold is 8,000, then the total variable costs for 8,000 units sold is:
Total variable costs = Variable cost per unit x Number of units sold Total variable costs = $5 x 8,000 Total variable costs = $40,000
This means that to sell 8,000 units, the company incurs $40,000 of variable costs.
Conclusion
Variable costs are the expenses that vary with the level of output or sales. They are important to know because they affect the profitability and break-even point of a business. To calculate the total amount of variable costs for a given level of output or sales, we need to multiply the variable cost per unit by the number of units sold. For example, if the variable cost per unit is $5 and the number of units sold is 8,000, then the total variable costs for 8,000 units sold is $40,000. This article explained how to calculate variable costs for 8,000 units sold using a simple formula and an example. According to Investopedia, understanding variable costs can help a business improve its efficiency and optimize its pricing strategy.
