Fixed and Variable Behave Differently
What happens to your costs when sales halve?
The idea
Fixed costs stay flat as volume changes; variable costs move with each unit sold.
In the real world
Rent is unchanged whether you serve ten customers or a thousand; materials are not.
Going deeper
The split determines how a business behaves when volume moves, which is invisible when you look at total costs at today's volume. Two companies with identical costs now can respond to a downturn in completely opposite ways.
High fixed costs mean high operating leverage: profit rises fast with volume and falls fast without it. High variable costs mean the business shrinks with demand and survives quiet periods at thin margin. Neither is better in general — the question is which risk you are structured to carry, and whether that matches how predictable your demand actually is.
Where it stops applying
The distinction is cleaner in theory than practice. Most costs are semi-fixed — staff can be reduced, but slowly and with cost — so the real question is how quickly a cost can be changed, not whether it is fixed.
Why it matters
The mix determines whether a quiet month is survivable and whether a busy one is profitable.
Try this today
Split last month's costs into the two buckets and see which dominates.
Test yourself
Two firms have identical costs at current volume. One is mostly fixed, the other mostly variable. Sales halve. What happens to each?
Show the answer
The variable-cost firm sheds most of its costs and survives with thin profit. The fixed-cost firm keeps paying nearly the same amount from half the revenue and moves sharply into loss. The same total at one volume behaves completely differently at another.
Learn this in the feed Answering from memory, then again days later, is what makes it stick.