Starting a Small Business – Understanding Fixed and Variable Costs
Every business, no matter how small, must understand its costs. Whether it’s a student selling handmade crafts, a local tutoring service, or a café opening its doors for the first time, knowing the difference between fixed costs and variable costs is essential for making good financial decisions.
This topic sits at the heart of GCSE and A Level Business Studies — and it’s one of the most practical ideas students can apply in real life.
What Are Fixed Costs?
Fixed costs do not change with the level of output. You pay them whether you produce 1 item or 1,000 items.
Examples:
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Rent for a workspace
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Insurance
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Website hosting
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Loan repayments
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Salaries of permanent staff
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Equipment that must be bought upfront
Even if the business has a quiet month, fixed costs still need to be covered.
What Are Variable Costs?
Variable costs change directly with the number of units produced or sold.
Examples:
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Raw materials
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Packaging
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Per-item manufacturing costs
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Online transaction fees
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Commission-based wages
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Energy use tied to production
If you produce more, variable costs rise; if you produce less, they fall.
Why the Distinction Matters
Understanding the two types of costs helps businesses:
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calculate break-even points
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set prices that cover costs and generate profit
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plan for slow periods and busy months
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manage cash flow
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make decisions about scaling up
It also helps students grasp how real companies think about production and sustainability.
A Simple Example
Imagine a student starts a small T-shirt printing business.
Fixed costs:
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Heat press machine: £300
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Website hosting: £10 per month
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Graphic software: £15 per month
Variable costs per shirt:
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Blank T-shirt: £3
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Printing materials: £1
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Packaging: £0.50
If the student sells a shirt for £12, then:
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Contribution per shirt = £12 – £4.50 = £7.50
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Fixed costs must be covered before profit begins
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Break-even = fixed costs ÷ contribution
This turns abstract theory into practical decision-making.
Linking to Profitability
A business becomes profitable only when the contribution from each item sold exceeds total fixed costs.
Students learn that profit isn’t just about selling lots of products — it’s about selling at the right price while managing both fixed and variable costs effectively.
Skills Highlight
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Distinguishing between fixed and variable costs
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Using cost information for break-even analysis
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Applying theory to real-world small business scenarios
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Understanding pricing, contribution, and profit margins
Why It Works in Teaching
Students often dream of running their own business — and this topic shows them the financial foundations they need.
It gives them the tools to model costs, test ideas, and evaluate whether a business is viable before investing time or money.
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