Listen to a Business English Dialogue About Variable cost
Maya: Hi Caroline, do you know what a variable cost is?
Caroline: Yes, I do. A variable cost is an expense that changes in proportion to the activity or production level of a business.
Maya: Exactly. Can you give me an example of a variable cost?
Caroline: Sure. A common example of a variable cost is the cost of raw materials used in manufacturing a product, which increases as production levels rise.
Maya: That makes sense. Are there any other examples of variable costs?
Caroline: Yes, other examples include labor costs for hourly workers, utility expenses that vary based on usage, and sales commissions that increase with sales volume.
Maya: I see. So, variable costs are expenses that fluctuate based on business activity?
Caroline: Exactly. Unlike fixed costs, which remain constant regardless of production levels, variable costs change as the level of production or activity changes.
Maya: That’s clear. How do businesses use variable costs in financial analysis?
Caroline: Businesses use variable costs to calculate their contribution margin, which helps assess profitability by measuring how much revenue exceeds variable costs.
Maya: I understand. So, variable costs play a crucial role in determining a business’s profitability?
Caroline: Yes, exactly. Managing variable costs effectively is essential for businesses to maximize profits and make informed financial decisions.
Maya: Thanks for explaining, Caroline.
Caroline: No problem, Maya. Understanding variable costs is fundamental for anyone involved in business finance.