Important Updates for Investors
Carla Pasternak's Premiere Issue of High-Yield International Just
Released
Income expert Carla Pasternak's debut issue of High-Yield
International covers a Taiwanese manufacturer yielding 9.5%... a
rare Mexican monopoly yielding 13.4%... and other top-performing
investments yielding up to 19.0%.
Government's Biofuel Timetable Could Spell +15,900% Growth
+15,900% growth might seem far-fetched... but it's not. In fact, it
is mandated by law. And I've identified the ONLY stock positioned to
capture this growth.
The
Silver Lining to a Falling Dollar
Despite the U.S. national debt, there is a silver lining for income
investors. This massive spending, combined with movement out of U.S.
Treasuries, is going to take its toll on the dollar, and
international income investors could reap the rewards in the form of
higher dividends. |
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| Variable
Costs |
What it is:
Variable costs are corporate expenses that vary in direct proportion to the
quantity of output. Unlike fixed costs, which remain constant regardless of
output, variable costs are a direct function of production volume, rising
whenever production expands and falling whenever it contracts. Examples of
common variable costs include raw materials, packaging, and labor directly
involved in a company's manufacturing process.
The formula for calculating total variable cost is:
Total Variable Cost = Total Quantity of Output * Variable Cost Per Unit of
Output
The term variable cost is not to be confused with variable costing, which
is an accounting method related to reporting variable costs.
How it Works/Example:
Let's assume XYZ Company has received an order for 5,000 widgets for a total
sales price of $5,000 and wants to determine the gross profit that will be
generated by completing the order. First, the variable costs per widget must be
determined.
Let's assume the following:
Annual Widgets Produced - 100,000
Raw Materials Costs - $10,000
Direct Labor Costs - $50,000
From this information, we can conclude that each widget costs 10 cents
($10,000/100,000 widgets) in raw materials and 50 cents ($50,000/100,000
widgets) in direct labor costs. Using the formula above, we can calculate that XYZ Company's total variable cost on the order is:
5,000 * ($0.10 + $0.50) = $3,000
Therefore, the company can reasonably expect to earn a $2,000 gross profit
($5,000 - $3,000) from the order.
Why it Matters:
While fixed costs, such as rent or other overhead, generally remain level,
variable costs will correlate with the number of products manufactured. Because
average variable costs differ widely among industries, comparisons are generally
most meaningful among companies operating within the same industry.
When analyzing a company's income statement, it should be remembered that rising
costs are not necessarily a troubling sign. Whenever sales rise, more units must
first be produced (excluding the impact of stronger pricing), which in turn
means that variable production costs must also increase. Thus, for revenues to
climb, expenses must also rise accordingly.
It is important, though, that revenues increase at a faster rate than expenses.
If, for example, a company reports volume growth of 8%, while cost of goods sold
(COGS) only rises 5% over the same span, then costs have likely declined on a
per unit basis. If a company can find ways to reduce the input costs associated
with producing each item it sells, then its profitability will improve. One way
to monitor this aspect of a company's business is to divide variable costs by
total revenues to figure costs as a percentage of sales.
Variable costs frequently factor into profit projections and the calculation of
break-even points for a business or project. Some costs change in a piecewise
manner as output changes and therefore may not remain constant per unit of
output. Also, note that many cost items have both fixed and variable components.
For example, management salaries typically do not vary with the number of units
produced. However, if production falls dramatically or reaches zero, then
layoffs may occur. This is evidence that all costs are variable in the long run.
A company with a large number of variable costs (compared to fixed costs) may
exhibit more consistent per-unit costs and hence more predictable per-unit
profit margins than a company with fewer variable costs. However, a company with
fewer variable costs (and hence a larger number of fixed costs) may magnify
potential profits (and losses) because revenue increases (or decreases) are
applied to a more constant cost level.
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Who Cares What the Market is Doing When You're Pulling in $28,900 a
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Two
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Spending
Since the stimulus package was signed into law on
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Investing Doesn't Get Any Easier Than This |
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