Basics of Microeconomics

Committed Cost

A committed cost is an investment that a business entity has already made and cannot recover by any means, as well as obligations already made that the business cannot get out of. You should be aware of which costs are committed costs when you are reviewing company expenditures for possible cutbacks or asset sales. For example, if a company buys a machine for $40,000 and also issues a purchase order to pay for a maintenance contract for $2,000 in each of the next three years, all $46,000 is a committed cost, because the company has already bought the machine, and has a legal obligation to pay for the maintenance. A multi-year property lease agreement is also a committed cost for the full term of the lease, since it is extremely difficult to terminate a lease agreement. There is usually a long-term legal agreement associated with a committed cost. If not, it is much easier to negotiate the termination of an expense. Similar Terms A committed cost has some similarity to the term sunk cost.

Fixed Cost

A fixed cost is a cost that does not change with an increase or decrease in the amount of goods or services produced or sold. Fixed costs are expenses that have to be paid by a company, independent of any business activity. It is one of the two components of the total cost of running a business, along with variable cost.

Variable Cost

A variable cost is a corporate expense that varies with production output. Variable costs are those costs that vary depending on a company's production volume; they rise as production increases and fall as production decreases. Variable costs differ from fixed costs such as rent, advertising, insurance and office supplies, which tend to remain the same regardless of production output. Fixed costs and variable costs comprise total cost.

Variable Margin

The variable margin starts with sales revenues but uses the cost of selling and administration as a way to figure your profit percentage. Add up your total revenue from sales. Add up all of your costs for marketing and administration, as well as shipping and invoicing. Subtract your variable costs from your revenues. Divide your variable costs by your profit and multiply by 100. For example, sales of $1,000,000 minus variable costs of $150,000 equals 850,000. Divide 150,000 by 850,000 for a figure of 0.17. Multiply by 100 and your variable costs are 17 percent of sales. The variable profit margin is 83 percent.

Total Margin

Total Margin is a measurement of an organization's fiscal health. It is calculated using financial information from the hospital's Statement of Revenue and Expense (also known as the Income Statement). The calculation of total margin is (Excess Revenues over Expenses/Total Revenue) x 100.