Variable cost meaning1/14/2024 ![]() ![]() $1,200/40 is $30 per cake to break-even each week. This bakery could benchmark that they will sell 40 cakes a week which would cost them $1,200 to produce. Working from this model the bakery can devise a good pricing structure by assuming minimum stock sold weekly and divide it by the total cost (variable and fixed costs).Looking at the difference in the two-week production compared to total costs it is clear that variable costs do not work in a linear fashion due to bulk buying and other factors.Personnel and electricity will only cost a bit more and the company equates fixed costs as the same ($700) with variable costs at $500. We would assume that this would be double the cost but the cost of machinery will stay the same. The following week they have an order for 40 cakes.Variable costs, including materials and additional electricity, equate to $300. $700 of this total cost is fixed and includes the purchase of machinery, electricity, personnel, etc. It costs a bakery $1,000 to make 20 cakes.It is also possible to capitalize on lower costs when dealing with high production, which can affect variable costs in the following way. In this case, you should add the costs into the right categories and plan according to these changes. This means that one month where the business is quiet the electricity bill could be a fixed cost of $70 but the next month, which is busy, could have a fixed cost of $70 and a variable cost of $50. For example, a utility bill can vary from month to month depending on production levels. Variable costs can be found by simply adding all variable costs together but sometimes it is not that straight forward. ![]()
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