Vinu: Manu, why should finance executives clearly separate fixed and variable costs?

Manu: Because decision-making depends on how costs behave, Vinu. Fixed and variable costs impact margins very differently.

Vinu: Start with the basics—what is the real difference?

Manu: Fixed costs remain constant within a range, like factory rent of ₹30 lakh per month.

Vinu: How does this affect margins?

Manu: Contribution margin comes from sales minus variable cost.

Vinu: Where do executives usually go wrong?

Manu: They try to cut variable costs when the real issue is high fixed overhead. For example, if monthly fixed costs rise from ₹1.5 crore to ₹2.2 crore, sales must increase significantly just to break even.

Vinu: How does this help in pricing decisions?

Manu: You must never price below variable cost. If a special order gives only ₹750 per unit and variable cost is ₹700, the margin is just ₹50. It may help only if fixed costs are already covered.

Vinu: What about expansion decisions?

Manu: Expansion increases fixed costs. Buying new machinery may add ₹40 lakh per month in depreciation and overheads. The business must be confident of additional contribution to absorb it.

Vinu: So what should finance executives track regularly?

Manu: Track contribution margin and fixed-cost coverage. If contribution is weakening while fixed costs rise, profitability will fall even if revenue grows.

Vinu: Final takeaway?

Manu: Know your cost behaviour.

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