A variable cost goes up and down with every unit you make or sell: ingredients, packaging, labels, the energy for each batch, card fees, app commissions. A fixed cost is one you pay whether you sell a lot or a little: the market stall, your phone plan, insurance, a kitchen membership, an equipment payment. Separating them tells you how much you need to sell each month not to lose money, and whether a big order at a lower price is worth taking.
How to tell whether a cost is fixed or variable
Ask one question: if I sell twice as much this month, does this cost double?
- If it doubles, or nearly: variable.
- If it stays the same: fixed.
- If it rises a bit but not double: mixed. Split it into a fixed part and a variable part.
| Cost | Type | Why |
|---|---|---|
| Ingredients | Variable | Every unit takes its own |
| Jars, bags, labels | Variable | One per unit |
| Oven energy for production | Variable | More batches, more energy |
| Delivery app commission | Variable | Charged per order |
| Card fees | Variable | Charged per sale |
| Market stall (monthly) | Fixed | Same fee however much you sell |
| Phone and website | Fixed | Same amount every month |
| Insurance | Fixed | Same amount every month |
| Equipment finance | Fixed | Due whether you produce or not |
| Electricity | Mixed | Part is used anyway, part rises with production |
| Your time | Depends | Fixed if you pay yourself monthly; variable if per batch |
Check what each payment method takes from you: cash, card, bank transfer. Whatever is charged per sale is a variable cost of that sale, not a fixed monthly expense.
Why it matters: contribution margin
When you sell a unit, you first get back its variable costs. What is left over is your contribution margin:
contribution margin = price − variable costs per unit
That leftover is what pays your fixed costs. Once they are covered, profit starts.
This changes how you read your numbers. A product with a high price but heavy variable costs can contribute less than a cheap one with few ingredients. Food cost percentage looks at only one variable cost, ingredients; contribution margin looks at all of them.
Worked example: sourdough at a farmers market
You sell sourdough loaves at a Saturday farmers market for $9.00 each.
Variable costs per loaf
| Item | Cost |
|---|---|
| Flour, salt and starter | $1.50 |
| Bag and sticker | $0.30 |
| Oven energy per loaf | $0.30 |
| Card fees (say they average $0.30 a loaf) | $0.30 |
| Total variable | $2.40 |
Contribution margin: 9.00 − 2.40 = $6.60 per loaf
Monthly fixed costs
| Item | Cost |
|---|---|
| Market stall (4 Saturdays × $60) | $240 |
| Shared kitchen membership | $200 |
| Equipment finance (mixer) | $80 |
| Bookkeeping | $60 |
| Phone and website | $45 |
| Insurance | $35 |
| Total fixed | $660 |
How much you need to sell
units to cover fixed costs = fixed costs ÷ contribution margin
660 ÷ 6.60 = 100 loaves a month. Below 100 you lose money; from loaf 101 onwards, each one leaves you $6.60. If you also want to pay yourself $1,320 a month as a fixed wage, fixed costs rise to $1,980 and you need 1,980 ÷ 6.60 = 300 loaves. The guide to the break-even point goes further with this.
The big order at a discount
You normally sell 120 loaves a month. A café asks for 40 loaves a month at $6.00 each, collected from your kitchen, paid by bank transfer.
If you look at the "full" cost, with fixed costs spread in:
- Fixed costs per loaf: 660 ÷ 120 = $5.50
- Variable cost of a café loaf (no card fee): 1.50 + 0.30 + 0.30 = $2.10
- Full cost: 2.10 + 5.50 = $7.60
- Wrong conclusion: "at $6.00 I lose $1.60 a loaf".
If you look at variable costs:
- Contribution per loaf: 6.00 − 2.10 = $3.90
- 40 loaves × $3.90 = $156 more a month
Your market sales already cover the fixed costs. The stall, the kitchen and the insurance cost the same with or without the café. As long as you have the oven time and the hours to bake 40 more loaves without letting your market customers down, the order leaves you $156.
Two cautions. If the order means buying a second oven or hiring help, those new fixed costs go into the sum. And you cannot sell everything at $6.00: somebody has to pay the fixed costs, and here your full-price market sales are doing it.
Fixed and variable inside loaded cost
Loaded cost per unit mixes both: ingredients and packaging (variable) with your time and a share of the month's running costs (fixed, spread out). That is right, because your normal price has to cover everything. For a fair way to spread fixed costs across products, by kitchen hours or by batches, see how to allocate overhead to products.
Just remember that the fixed part per unit is not really per unit. Make more and it falls; make less and it rises. In the example, at 100 loaves a month each one carries $6.60 of fixed costs; at 200 loaves, $3.30.
And in your monthly figures
When you work out your monthly profit, cost of goods sold mostly groups variable costs: what the products you sold cost you. Fixed costs sit separately, as monthly expenses. That split is what lets you see whether a bad month came from selling too little or from spending too much. See cost of goods sold for food businesses.
For the full costing method, from ingredients to cost per unit, go back to how to calculate the cost of a food product.
Do it with the calculator
Enter your recipe, packaging and price into the food cost calculator, with "Your hourly pay" at 0 if your wage is a fixed cost, and it shows your contribution margin as "You earn per unit". Divide your monthly fixed costs by it and you have how many units you need to sell to cover them.
Frequently asked questions
Is energy a fixed or variable cost?
Mostly variable in a production kitchen: more batches, more energy. If you bake in your home kitchen, estimate the part used for production and treat that as variable.
Is my own pay a fixed cost?
If you pay yourself a set amount each month, yes. If you pay yourself per batch or per hour worked, it behaves like a variable cost. Pick one approach and use it consistently.
Do fixed costs never change?
They change, but not because you sold one more unit. Your kitchen membership might go up next year; it does not go up because you sold 20 more loaves this month.
Why separate them if I have to pay everything anyway?
For three decisions: how many units you must sell not to lose money, whether to accept a large order at a discount, and which product to push. With everything lumped together, those questions have no clear answer.