Variable Costs

Variable costs are those costs that increase with each unit of sensor produced. Fixed costs are those that will remain the same. If you subtract variable costs from sales, you will get the contribution margin. The Contribution Margin in the simulation is defined as (Price minus Unit Cost minus Inventory Carry Cost divided by Price), or (Price minus Variable Cost divided by Price). An ideal contribution margin is 30% or above.

In order to reduce variable costs, a company should develop better technology that requires a lower usage of materials and labor per unit of output produced. This is a lower-cost competitive strategy. Forecasted variable costs in the simulation include labor, material and inventory holding costs. Increasing automation will also reduce variable costs as production will become less expensive for all of the products overall.

Reducing variable costs could be achieved by minimizing the usage of promotion and marketing for products. Variable costs are also reduced when excess unit are used. This means a team should try to calculate an accurate measure of exactly what the market will buy of either high tech or low tech products. The closer these target production figures match customer the demand, the lower the unsold products will be hence saving money on a variable level.

The higher variable costs become, the more costly the product will be to produce. Variable costs have a direct effect on profit and therefore net income. Another way to reduce variable costs would be to reduce the mean time before failure and other choice factors in your control, like size. This would include choosing the minimal MBTF within the given customer desire range. By this logic, high tech products will typically have higher variable costs per unit because they have more costly specifications. Increasing price of the product will offset high variable costs but could also reduce sales, which could end up not effecting the bottom line.