I just realized why my business should care so much about fixed costs and variable costs because they affect every decision, from setting product prices to planning production and investments.

Let's understand better what fixed cost and variable cost are. Fixed costs are expenses that do not change regardless of whether the business produces a lot or a little, such as office rent, employee salaries, insurance, or loan interest. These must be paid every month whether the business is operating or not.

On the other hand, variable costs change according to the volume of production or sales. The more you produce, the higher the costs proportionally, such as raw materials, direct labor, packaging, and transportation. These decrease when production is lower.

Why are they important? Because if you understand fixed costs and variable costs well, your business can accurately calculate total costs and use that information to make decisions, such as what price to set to break even and make a profit, or how much to produce to minimize per-unit costs.

In reality, when direct labor costs are high, many companies decide to invest in machinery to replace labor, which results in more stable fixed costs. This is a mixed cost analysis that helps businesses better evaluate the return on investment.

Good cost management requires knowing which costs are fixed and which are variable, because it helps identify areas with high costs and find ways to reduce them. It also aids in assessing how market changes will impact costs and profits.

In summary, understanding fixed costs and variable costs is a fundamental part of business management. It helps make informed decisions and leads to sustainable growth in the long term.