Hi all, I notice for example labour in certain industries can be regarded as fixed costs. However certain fixed costs like labour and spoilage grows too as the company gets bigger. Is my understanding correct?
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Hi there,
Salaried labor is a fixed cost. Hourly labor is a variable cost. Spoilage is a fixed cost.
Fixed costs AND variable costs grow as the company gets bigger. Please don't get confused by the word "Fixed". Fixed costs are not immovable...if I change my marketing budget, the costs change! If I build a new factory to produce more goods that capex fixed cost changes!
A variable cost is one that changes for each additional unit produced. A fixed cost stays fixed for a given incremental increase in productions.
This depends on a case by case basis. Please share some of those examples to give us more context. Please also define your current usage of spoilage.
Some examples include:
- IT - software revenue generally scales without need for more people - hence labor cost is relatively fixed. Hence companies like Adobe have such high gross margins.
- Manufacturing - trickiest. Depending on level of automation - it can range from a fully variable to a fully fixed cost.
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