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Anonymous A
on Jul 31, 2021
Global
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Are labor, spoilage and advertising fixed cost?

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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Ian
Coach
on Aug 01, 2021
Top US BCG / MBB Coach - 5,000 sessions |Tech, Platinion, Big 4 | 9/9 personal interviews passed | 95% candidate success

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.

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Agrim
Coach
on Jul 31, 2021
#1 Awarded Coach | BCG Dubai Project Leader | Master Casing in only 3 Hours | 10y in Consulting | Free Intro Call

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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Fixed & Variable Costs
When preparing for case interviews, you'll quickly find that "fixed costs" and "variable costs" always come up. These concepts are important not only for financial analysis but also for strategic decision-making in companies. Let’s explore what these costs are and how you can skillfully use them in your cases. ✨ What are Fixed and Variable Costs?Fixed Costs are expenses a company incurs regularly, regardless of how much it produces or sells. These costs stay constant whether the company is active or not. Typical fixed costs include:RentSalaries for full-time employeesAdministrative expensesDepreciationWhether a company sells a lot or just a little, these fixed costs still need to be covered. They form the basis of a company’s cost structure and are crucial for long-term planning.Variable Costs, however, directly depend on business activity and change with the production level. They increase as more is produced and decrease when production is reduced. Examples of variable costs include:Raw materialsEnergy costsWages for temporary staffAn important point is that variable costs ideally drop to zero when there is no production. This makes them particularly flexible, as they can adapt to the current business situation.Together, these two cost types – fixed and variable costs – form a company’s total costs. To get a complete picture of the company's financial position, it’s crucial to divide costs into these two categories.At this point, be sure to check out the profitability framework. Profit is calculated by subtracting total costs from revenue. To understand cost behavior, it’s essential to segment them into fixed and variable costs – a perfect exercise!You can find more frameworks in our Case Interview Basics. 🚀
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