Costs that rise and fall directly with the number of units sold, such as raw materials, freight and sales commissions.
Variable costs are the bulk of cost-of-goods-sold for a manufacturer and are close to zero for a software company, which is why software gross margins sit near 80% and tool makers sit near 40%.
Revenue minus variable costs is contribution-margin, the money available to cover fixed-costs. Knowing it lets you calculate how much volume the company needs before it breaks even.
Example: each Northwind kit sells for $700 with $392 of materials, labour and freight. The contribution is $308. Against $250M of fixed opex, Northwind needs roughly 812,000 kits a year simply to reach breakeven at the operating line.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.
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