Fixed or Variable Cost

Question

Lets take a a cpg company, e.g. a soap manufacturer. The number of employees will vary with how much they sell (e.g. if they sell 10 soaps or 10M annually), but then at the same time they might have the same amount of employees if they sell 10M or 10.01M soaps annually. So it is kind of a fixed cost, but at the same time a variable cost? What is the correct classification in such cases?

Answer 1

Hi,

You have two differentiate the type of employees here :

- Blue collars : directly related to production volume > variable

- white collars : blue collar management (semi-variable) and other indirect and support function > fixed

Best
Benjamin

Answer 2

In the short run, personnel costs are usually considered fixed (except for personnel paid by output, such as an artisan who is paid for the object he builds etc..

In the long run personnel costs are variable in the sense that they can be varied. But they do not vary (much) with the output produced, at least not for reasonable growth rates. Also, they do not vary linearly (usually) with output. This obviously depends ugely on the type of industry - consulting is pretty close to linear, software a lot less, chip manufacturing also less etc. ...

Answer 3

Hi,

It can be either fixed or variable or both (Benjamin's example). You can mention that there are different types of employees (blue collar and HQ) and ask the interviewer what split does he have.

Best!