Variable Cost-Plus Pricing

Finance, a la shmoop. what it's the difference between fixed and variable

costs? all right welcome on people nothing was broken so nothing had to be

fixed. a fixed cost means that it's like fixed in place- like the steely-eyed gaze [man cries as dollar bill is torn in half]

of Ahab here. a fixed cost is one that you incur whether you sell one unit of a

widget or a million units. variable costs well they vary. they change. think about

the cost of the plastic that goes into each widget. sell only one widget and

well your plastics bill is pretty low. sell a million widgets and it likely costs

a lot to buy the raw plastics will make them widgets right? but okay that's the [kid grins holding stack of plastic toys]

bird's eye view .what time is it? yes example time! okay you own an absinthe

stand called absinthe Pete's. yeah it's a 1925 and people are bored in order to

sell the absinthe you had to have an absinthe from milking factory, which cost

you 400 bucks to build. its 1925 so things are you know cheaper. and deadlier.

all right well that 400 bucks for the factory is a fixed cost. you have to

spend it whether you sell one glass of absinthe or a zillion. without the absent

from milker you have nothing to sell. so you also have to pay 50 bucks a month to [men negotiate]

rent the land on which that factory sits that $50 rent is a fixed recurring cost.

your cost of rent doesn't change whether you sell one gallon of gentleman Pete's

aged reserve or 10,000 gallons of it, you still pay that 50 bucks a month to rent

the land. fixed recurring cost. all right so what's variable. well the Absinthe

itself costs you two cents a cup and you sell it for a nickel. the Absinthe can be

stored basically forever before it goes bad ,you know it's poison so like what [Absinthe with a loaf of bread]

would you expect? that it go bad ?like what what is bad?

well so the cost of producing the Absinthe itself is variable.

if you don't sell any in April the cruelest month ,then you have no variable

cost of absinthe. got it that is the cost of absinthe was zero because you sold

none just keep it in the inventory for next month. if you sell 5000 drinks at 2

cents a drink in may to help people go away, well then your cost varied that

month from zero in April the cruelest month, the 5000 times 2 cents or a

hundred bucks in May. the cost of the absinthe itself is variable. and that's

it. fixed costs are set and don't change. they're fixed in position that can be

one-time fixed charges like the cost of building the factory, and they can be

recurring fixed charges like the cost of that monthly rent .it's the same amount [factory being built]

each month, so it's fixed but it recurs. and then there's variable costs. those

change with output or production levels or changes in the business environment

like if suddenly the food that an absinthe eats gets more expensive. well

then you could be producing the same volumes but each unit of that volume

would vary in costing you more to produce .and trust us when you're dealing

with absinthe it always ends up costing you the next morning. yeah drink plenty [man falls over after drinking several bottles of absinthe]

of water with that.