Business Glossary
What Are Fixed vs Variable Costs?
Fixed costs remain constant regardless of how much you produce or sell — rent, permanent salaries, insurance. Variable costs change in line with output — materials, commission, packaging. This distinction is fundamental to pricing, break-even analysis, and cost management.
The Formula
Total Costs = Fixed Costs + (Variable Cost Per Unit × Units Produced)
Worked Example — UK SME
A UK food manufacturer: monthly fixed costs £28,500 (rent, management salaries, insurance, utilities). Variable cost per unit: £4.20 (ingredients, packaging, direct labour). At 8,000 units: total costs = £28,500 + £33,600 = £62,100. At 12,000 units: £78,900.
UK Benchmark
📊 For most UK SMEs, fixed costs represent 40–70% of total costs. High fixed-cost businesses have more operating leverage — above break-even, profit grows faster. But they are more vulnerable to revenue falls.
Common Questions
What is operating leverage?
High fixed-cost businesses have high operating leverage — once fixed costs are covered, each additional unit of revenue generates almost pure profit. But revenue falls below break-even are more damaging.
Are semi-variable costs fixed or variable?
Some costs have both elements — phone bills (fixed line rental + variable usage), energy (fixed standing charge + variable consumption). Model these by separating the fixed and variable components.
How do I reduce fixed costs in a UK SME?
Review all fixed contracts annually. Renegotiate property leases at renewal. Consider variable staffing models for functions that don’t need full-time resource. Every pound of fixed cost reduction improves break-even permanently.
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