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What is Variable cost?

A cost that rises and falls in proportion to production volume or sales, such as material costs, outsourcing costs and sales commissions. The ratio of variable costs to sales is called the variable cost ratio.

Japanese name: 変動費

Variable cost appears in 8 practice questions across 1 topic, including Business Strategy and Accounting Basics.

Field: Business Strategy and Accounting Basics

Try it: questions about Variable cost

Among the costs of a semiconductor fab, which is generally classified as a variable cost?

  1. ADepreciation of manufacturing equipment
  2. BMaterial costs such as wafers and chemicals
  3. CRent for the cleanroom building
Show answer and explanation

Answer: B. Material costs such as wafers and chemicals

Variable costs rise and fall in proportion to production volume or sales; typical examples are material costs for wafers, photoresist, chemicals and gases, outsourced processing costs and sales commissions. Fixed costs are incurred in a constant amount each period regardless of production volume, such as depreciation of equipment and buildings, rent and the salaries of permanent employees. A semiconductor fab requires large investment in equipment and has a high share of fixed costs, so profit tends to fall sharply when the utilization rate drops.

A company has sales of ¥50 million, variable costs of ¥20 million and fixed costs of ¥24 million. Which is its break-even sales?

  1. A¥40 million
  2. B¥44 million
  3. C¥60 million
Show answer and explanation

Answer: A. ¥40 million

The variable cost ratio is 20 ÷ 50 = 0.4, so the contribution margin ratio, the part of sales available to cover fixed costs, is 1 − 0.4 = 0.6. Break-even sales are the sales at which the contribution margin exactly covers the fixed costs, so 24 ÷ 0.6 = ¥40 million. The current sales of ¥50 million are above the break-even point, and the profit is 50 − 20 − 24 = ¥6 million.

Variable cost in the explanations

Questions that mention Variable cost (8)

  1. Among the costs of a semiconductor fab, which is generally classified as a variable cost?
  2. A company has sales of ¥50 million, variable costs of ¥20 million and fixed costs of ¥24 million. Which is its break-even sales?
  3. Which is the margin of safety ratio of a company with sales of ¥200 million, a variable cost ratio of 70% and fixed costs of ¥45 million?
  4. In a business with fixed costs of ¥30 million and a variable cost ratio of 60%, which is the sales needed to make a profit of ¥10 million?
  5. A semiconductor manufacturer is developing a dedicated chip. The selling price per chip is ¥4,000, the variable cost per chip (wafer, package, test and so on) is ¥2,400, and the fixed costs such as mask making and design are ¥800 million. Which is the break-even sales volume?
  6. A business has fixed costs of ¥27 million and a variable cost ratio of 40%, and has no costs other than variable and fixed costs. Which is the sales needed to achieve an operating profit margin (operating profit ÷ sales) of 15%?
  7. There are two ways to make a product: plan A (fixed costs ¥10 million, variable cost ratio 60%) and plan B, which automates the production line (fixed costs ¥16 million, variable cost ratio 45%). Above a certain level of sales, plan B earns more profit than plan A. Which is that level?
  8. At a fab, the monthly number of wafer starts x (thousand wafers) and electricity cost y (¥ million) were (x, y) = (2, 5), (4, 9), (6, 11) and (8, 15). If the regression line y = ax + b is found by the least squares method and the slope a is taken as the variable cost per thousand wafers and the intercept b as the fixed cost, which combination is correct?

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Semiconductor, Electronics and Computing Calculators

Break-Even Point CalculatorCalculate the break-even sales, variable cost ratio, marginal profit ratio, margin of safety and the sales needed for a target profit from sales, variable costs and fixed costs, with a chart

Related terms

Fixed cost Contribution margin Break-even point Photoresist Depreciation Correlation coefficient ABC analysis Five forces analysis Income statement (P/L) Net present value (NPV)

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