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Fixed Costs vs. Variable Costs

The difference between fixed costs and variable costs is that fixed costs don’t fluctuate as your sales volume changes.  The landlord expects the same rent every month regardless of whether you are having a good month or a bad month.  Rent is typically a fixed cost.

Variable costs are tied to sales and usually are either Cost of Goods Sold (often called COGS) or some other direct expense tied to sales such as commissions, shipping charges or packaging.  If I were a hot dog vendor – the more I sell, more supplies I need – hotdogs, buns, condiments, sauerkraut, napkins – my food costs are directly related to sales.

There are exceptions of course.  If my business grows dramatically, I may need to take on a larger space thus increasing my rent.

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Tags: COGS, Cost of Goods Sold, fixed costs, Fixed Costs vs. Variable Costs, sales volume, variable costs