Variable Cost

What is Variable Cost?

A variable cost is an expense that rises or falls in direct proportion to a business’s level of production or sales. In short, the more you produce or sell, the more you spend. The fewer units you make, the less you pay. This type of cost scales with output, making it one of the most critical components in pricing strategy, financial planning, and profitability analysis-especially in fast-moving industries like print-on-demand (POD).

Typical variable costs include:

• Direct labor
• Raw materials
• Packaging
• Shipping and distribution
• Credit card processing fees

Whether you're printing 10 or 10,000 custom phone cases, your variable costs will shift accordingly.

Variable Cost vs Fixed Cost: What’s the Difference?

Unlike fixed costs-which remain stable regardless of output (think rent, salaries, or insurance)-variable costs fluctuate. For example, if your POD store sells 100 shirts, you’ll incur raw material and shipping costs for all 100 units. But if you sell none, those costs won’t appear.

To learn how both fixed and variable costs play into your overall profitability, check out our beginner’s guide to print-on-demand.

How to Calculate Variable Cost Per Unit

To find your variable cost per unit, follow these four simple steps:

1. Identify your variable costs: Include items like direct labor, materials, utilities, and delivery expenses.
2. Calculate total variable cost: Add all variable costs for a given production period.
3. Determine production volume: Count the number of units produced or sold in that same period.
4. Divide total variable cost by unit volume:
   Variable Cost Per Unit=Total Variable CostTotal Units Produced\text{Variable Cost Per Unit} = \frac{\text{Total Variable Cost}}{\text{Total Units Produced}}Variable Cost Per Unit=Total Units ProducedTotal Variable Cost​

Example:

Let’s say your business produced 1,000 items in a month, incurring $10,000 in variable costs (labor, materials, shipping, etc.).

Variable Cost Per Unit=$10,0001,000=$10\text{Variable Cost Per Unit} = \frac{\$10,000}{1,000} = \$10Variable Cost Per Unit=1,000$10,000​=$10

Understanding this figure is crucial when setting prices, projecting profit margins, or calculating your break-even point.

Why Monitoring Variable Costs Matters

Variable costs directly impact:

• Profit margins
• Break-even analysis
• Pricing decisions
• Scalability of production

As production scales, total variable costs rise-but economies of scale can reduce the variable cost per unit. Monitoring this can help you operate more efficiently and make smarter decisions about inventory, supplier contracts, and product pricing.

Real-World Example

Imagine you run a POD business selling printed t-shirts. Each shirt requires fabric, ink, labor, and packaging. If you produce one shirt, those costs are relatively high per unit. But if you produce 1,000, the cost per shirt drops significantly, while the total variable cost increases.

That’s the beauty-and challenge-of variable costs: they move with you. If you're aiming to scale profitably, understanding how they function is non-negotiable.

Want to see how variable costs fit into the bigger picture of launching and growing a POD business? Explore our guide on how to start a print-on-demand store without inventory.