Briefly explain the difference between fixed and variable expenses?

Question: Briefly explain the difference between fixed and variable expenses?

Fixed expenses are costs that remain the same regardless of the level of output. Variable expenses, on the other hand, are costs that change in proportion to the level of output.

Here are some examples of fixed expenses:

• Rent
• Utilities
• Insurance
• Salaries
• Depreciation

Here are some examples of variable expenses:

• Cost of goods sold
• Commissions
• Shipping
• Marketing
• Advertising

Fixed expenses are important to consider when budgeting because they can be a significant portion of a business's costs. Variable expenses are also important to consider, but they are typically less predictable than fixed expenses.

The difference between fixed and variable expenses can be illustrated by looking at a business that sells widgets. The business might have a fixed monthly rent of $1,000, regardless of how many widgets it sells. The business might also have a variable cost of $5 per widget, which means that the total cost of producing and selling widgets will increase by $5 for every widget that is sold.

The business's total costs will be $1,000 + ($5 per widget) * number of widgets sold. If the business sells 100 widgets, its total costs will be $1,500. If the business sells 200 widgets, its total costs will be $2,000.

The fixed expenses remain the same, but the variable expenses increase in proportion to the number of widgets sold.

By understanding the difference between fixed and variable expenses, businesses can better manage their finances and make informed decisions about pricing, production, and marketing.

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