What is the role of variable costs in determining the profitability of a product?

What is the role of variable costs in determining the profitability of a product?

Variable costs play a crucial role in determining the profitability of a product. These costs directly vary with the level of production or sales volume. As the production or sales increase, variable costs also increase, and vice versa. By analyzing the relationship between variable costs and revenue, businesses can determine the breakeven point, where total revenue equals total variable costs. Beyond the breakeven point, any additional sales generate a contribution margin, which contributes to the overall profitability of the product. Therefore, understanding and effectively managing variable costs is essential for maximizing profitability.