Cost reduction short term vs long term

Question

Is reducing varaibale costs the best way to decrease costs for the short-term and targeting fixed costs more of a long-term solution? Is there ever a situation where it's better to reduce fixed costs in the short term (if yes, pls share an example)

Answer 1

Hey,

I agree with Ian, you always need to consider the specific situation. I will not say during a case interview that variable cost reduction is usually a better way for short-term cost reduction.

Variable costs (raw material, hourly labour) could be linked to pre-agreed contracts, which very difficult to renegotiate - i.e. long time to renogotiate - (e.g., contract with supplier, etc.). On the other side some fixed cost could be quicker to reduce (think to install a cheaper software when your current licence is expiring). Just few example, but it is very dependent on the situation, industry, etc.

Answer 2

Quite simply: No. The answer truly depends.

We could shutdown a factory today (fixed cost), cancel our plane leases (fixed cost) today, etc. etc. In terms of labor, you could fire your salaried (fixed cost) workers today or next year, and you could also fire your hourly (variable cost) workers today or next year.

So, as you see, you need to evaluate each cost-cutting decision independently, and FC vs VC does not have an instrinsic difference in terms of speed of implementation.

Answer 3

Hi, I confirm it strongly depends on the context

Best,
Antonello