Variable costs - Variable costs do vary in relation to output, they rise as production increases and fall as production decreases. For example, Dominoes Pizza produces pizzas on a daily basis. They use raw materials such as flour, yeast and salt to make their pizzas. These are the variable costs that Dominos Pizza need to pay for, as well as any other materials they need for production. The more Pizzas they sell, the more money they will have to buy more raw materials, the less they sell, the less money that have to buy their raw materials.
Fixed costs - 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 things that have to be paid by a company. Fixed costs and variable costs are the two components of the total cost of running a business. For example, Dominos Pizzaz fixed costs are spent on facility, insurance , security and equipment. These are fixed costs because regardless of production volume, these expenses need to be paid.