01 Two kinds of cost
Fixed costs stay the same each month whether you sell a little or a lot: rent, permanent staff salaries, loan interest, insurance, software subscriptions.
Variable costs go up and down with each unit you make or sell: raw material, packing, piece-rate wages, fuel for delivery, sales commission, payment gateway charges.
Some costs are mixed. Electricity often has a fixed monthly charge plus a charge per unit used. Split such costs into their two parts.
- Fixed: rent, salaries, interest, insurance, licence fees.
- Variable: raw material, packing, piece wages, delivery fuel, commission.
- Mixed: electricity, phone, vehicle running.
02 Why volume lowers your cost per unit
Fixed costs are shared across all units. The more you produce, the smaller each unit's share. That is why an idle machine is so expensive.
Example (hypothetical numbers, not data): a small flour mill has fixed costs of ₹40,000 a month and variable cost of ₹2 per kg. At 10,000 kg a month, cost per kg = ₹2 + ₹4 = ₹6. At 20,000 kg, cost per kg = ₹2 + ₹2 = ₹4. Same mill, same staff, one-third lower cost per kg.
03 Fixed costs raise both reward and risk
A business with high fixed costs earns a lot once sales cross break-even, but loses heavily in a bad month. A business with mostly variable costs earns less per unit but survives slow months.
When you start, keep fixed costs low: rent a shed before building one, use job-work before buying every machine, and hire on piece rate until volumes are steady.