Do you want to earn ten points and have a business mind?..?

Question

What is the advantages to converting from fixed to variable costs?

Answer 1

They are really two different types of costs.

Fixed cost are expenses that do not change in proportion to business activity. (e.g. rent, salaries, capital equipment...)

Variable cost are expenses that change in proportion to business activity.(e.g. raw materials,....)

You certainly wouldn't want your rent to go up if your business had a good month, or your salary to go down if you had a bad month. Likewise, you wouldn't want the cost of your raw materials to stay the same each month if the demand decreases, so the advantage to converting from fixed to variable costs is that the costs will increase or decrease in proportion to business activity.

Answer 2

The advantage of switching from direct to variable costs is that variable costs vary in direct proportion to changes in propduction volume. As production increases, variable costs increase in proportion to the change in volume. Likewise, as production decreases, costs decrease in direct proportion to the change in volume. So as production decreases your costs are lower.

Answer 3

No.