Variable cost
AccountingA cost that rises and falls broadly in proportion to output or sales.
In plain terms
Raw materials and freight. Double the sales, double the spend, and the margin barely moves.
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Glossary
Every term is defined twice: once the way a filing would put it, and once the way somebody would explain it to you across a table. The second one is usually the one that sticks.
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Fixed cost
AccountingAlso called: Fixed vs variable cost
A cost that does not change with the volume produced or sold over the relevant range.
In plain terms
Rent, salaries and depreciation. They arrive whether forty customers come or four hundred.
Contribution margin
AccountingRevenue minus variable costs — what each additional sale contributes towards fixed costs and profit.
In plain terms
The part of every extra rupee of sales that is actually left over to pay the rent.
Operating leverage
Fundamental analysisAlso called: Degree of operating leverage, DOL
The degree to which a company’s profit changes for a given change in revenue, set by its ratio of fixed to variable costs.
In plain terms
The cinema versus the caterer. High fixed costs mean a 10% sales rise can be a 40% profit rise — and a 10% fall can be a warning.