Hi,

Variable costs only depend on units sold. Try to image a company with only variable costs:

If you sell 10 units, let's call "r" the revenues per unit and "vc" the variable costs per unit:

Revenues = 10*r

Variable costs = 10*c

Profit = 10 * (r-c)

If you register a reduction in revenues, let's say 10% and you don't change the price per unit (meaning the revenues per unit, meaning "r"), it means that the units sold are decreased by the 10% (meaning you sell 9 units instead of 10).

You can easily see that, if the variable costs per unit remain the same, that 1. the variable costs decrease by the same amount (10%) an the profit decreases by exactly the same amount as well:

New Revenues = 9*r --> 10%

New Variable costs = 9*c --> 10%

New Profit = 9 * (r-c) --> 10%

But, if we introduce the fixed costs, let's call them "fc", as a fixed number that doesn't depend on units sold (e.g., rent, gas and electricity bills, machines, ...), you can see that if revenues decreases by 10%, costs don't decrease by the same amount, but less (because the fixed costs remain the same, no matter what), thus the profit decreases more than 10%:

New Revenues = 9*r --> 10%

New Variable costs = 9*c + fc (constant no matter what) --> <10%

New Profit = 9 * (r-c) - fc --> >10%

Please let me know if something is not clear.

Hope it helps!

Hi,

Variable costs only depend on units sold. Try to image a company with only variable costs:

If you sell 10 units, let's call "r" the revenues per unit and "vc" the variable costs per unit:

Revenues = 10*r

Variable costs = 10*c

Profit = 10 * (r-c)

If you register a reduction in revenues, let's say 10% and you don't change the price per unit (meaning the revenues per unit, meaning "r"), it means that the units sold are decreased by the 10% (meaning you sell 9 units instead of 10).

You can easily see that, if the variable costs per unit remain the same, that 1. the variable costs decrease by the same amount (10%) an the profit decreases by exactly the same amount as well:

New Revenues = 9*r --> 10%

New Variable costs = 9*c --> 10%

New Profit = 9 * (r-c) --> 10%

But, if we introduce the fixed costs, let's call them "fc", as a fixed number that doesn't depend on units sold (e.g., rent, gas and electricity bills, machines, ...), you can see that if revenues decreases by 10%, costs don't decrease by the same amount, but less (because the fixed costs remain the same, no matter what), thus the profit decreases more than 10%:

New Revenues = 9*r --> 10%

New Variable costs = 9*c + fc (constant no matter what) --> <10%

New Profit = 9 * (r-c) - fc --> >10%

Please let me know if something is not clear.

Hope it helps!