Why is it so hard to control variable costs or prices?

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Dr. Bill Berry

Market Effects

Hi All,

A measure many people look at is Price-to-Earning or PE ratio. PE is a market-based ratio. In other words, the price is set by the market external to the company. This means that management cannot control it. This is also not a category of ratio.

Accounting Coach is good for this: Ratios

Generally, the variable costs are market driven for raw materials and labor market driven for direct labor. What this means is that the contribution margin is a function of the sales price only. In competitive markets, the sales price also tends to be difficult to change. This leaves volume as one of the two drivers. Increasing volume requires either increasing perceived value relative to competitors or lowering prices to accomplish the same thing. The good news is that if we move to a more technology driven (higher capital) approach we can increase the volume and even though fixed costs rise, the fixed cost per unit could even be lower if we can increase the volume enough using this approach.