In a poor economy, the cost of the variable costs is very high. The variable costs are the costs that change over a short period. These costs affect the returns on capital, a management to that is very crucial while making the financial decisions.
The variable costs include the cost of causal labor, cost of transportation of goods among others. Due to the high cost of living in a poor economy, the variable costs are high especially for a new firm that is enjoying the economies of scale. Economies of scale refers to the advantages that a firm enjoys as a result of expansion in its operations, as a firm operations expands, the average cost per unit decreases hence increasing the profitability. In reference to the variable costs, it is vital for any firm to ensure that these costs are as low as possible which is impossible when the economy is poor. Further, the variables costs are unpredictable since the economy is very unstable.
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