Fixed, Variable & Step Costs
How each cost moves when the business gets busier.
In your head, jot if needed · no calculator why?
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the idea
Costs are sorted by how the total moves when the business gets busier over the next few months, not by how often the bill arrives.
A fixed cost stays flat: rent. A variable cost moves with every unit: flour for each loaf. A mixed cost is a flat fee plus a charge per unit: a phone plan with a monthly fee and a charge per minute. A step cost stays flat until capacity runs out, then jumps by a whole chunk: one more van, one more supervisor.
techniques
Ask what one more unit does
- Picture the business doing one more unit of work.
- Nothing changes: fixed. A little more every time: variable.
- A flat fee plus a charge per unit: mixed.
- Nothing until a limit, then a whole chunk: step.
worked example
A bakery pays $2,000 rent a month and $0.40 of flour for each loaf. How much do these two costs rise if it bakes 500 more loaves this month?
- Rent is fixed, so it does not move.
- Flour is variable: $0.40 × 500 = $200.
Answer: $200
Split a mixed bill
- The flat monthly fee is the fixed part.
- Rate × activity is the variable part.
- The total bill is the two added together. Answer only the part asked for.
worked example
A delivery contract costs $150 per month plus $4 per stop. Last month had 300 stops. How much of last month's bill was variable?
- Variable: $4 × 300 = $1,200.
- The $150 fee is the fixed part; the whole bill was $1,350.
Answer: $1,200
Round step costs up
- Divide the demand by what one can handle.
- Any remainder needs one more: round up.
- Check: one fewer would leave some work uncovered.
worked example
One van can handle at most 40 deliveries a day. How many vans are needed for 130 deliveries a day?
- 130 ÷ 40 = 3.25.
- 3 vans cover only 120 deliveries, so round up to 4.
Answer: 4
watch out for
- Calling a bill fixed because it arrives every month. Behavior is about how the total moves with activity.
- Leaving the fixed fee out of the total bill, or putting it into the variable part.
- Rounding a step cost down. 130 deliveries need 4 vans; 3 would leave 10 deliveries with no van.
practice
Split a mixed cost
worked example
A forklift rental costs $550 per month plus $34 per hour of use. Last month the forklift was used for 20 hours. How much of last month's bill was fixed?
Answer: $550.00
- The fixed part is the $550 monthly fee; the $34 × 20 = $680 is the variable part.
Classify the cost
worked example
A florist's delivery contract costs $150 a month plus $3 per stop. How does this cost behave as activity changes over the next few months?
- Variable
- Step
- Fixed
- Mixed
Answer: Mixed
- A monthly fee plus a per-stop part makes it mixed.
- Fixed stays flat, variable moves with every unit, mixed is a base plus a per-unit part, and step jumps in chunks when capacity runs out.
Step costs: how many do you need?
worked example
One van can handle at most 15 deliveries a day. How many vans are needed for 178 deliveries a day?
Answer: 12
- Divide and round up: 178 ÷ 15 ≈ 11.87, so 12.
- 11 vans would leave 13 deliveries uncovered. You can't lease part of a van, so this cost jumps in steps.
Total cost at a volume
worked example
A print shop has fixed costs of $9,300 a month and variable cost of $3 per order. What is total cost for a month with 1,270 orders?
Answer: $13,110.00
- Total = fixed + rate × volume = $9,300 + $3 × 1,270 = $9,300 + $3,810 = $13,110.