Estimating Fixed and Variable Cost

© Frank Haluch 2011-2025

Often, sourcing is faced with validating a supplier’s bid price then determining a counteroffer during negotiations through cost analysis.  Unless the supplier is providing open book audits, getting supplier financial information is not easy. But there is a way to estimate fixed and variable cost using a supplier’s multiple quantity discount quote.

Analysis Objective: to quantify the fixed and variable costs used to generate a quotation to determine if the unit prices are more sensitive to changes in quantity or variable costs [are you dealing with a fixed cost or variable cost problem].

Why is it important to know if you are dealing with a fixed or variable cost problem?  Some fixed costs are not part of product cost and volume effects setup costs per unit.

To predict pricing for quantities not quoted, use the formula P=F/Q + V^*, where P = Price, F= Fixed Cost Q= Quantity and V = Equals Variable Costs (direct labor, direct material, variable overhead and profit).  

Use algebra to solve these simultaneous equations.

Step 1 Solving for “F”

$60 = F/10   + V       (Always subtract the highest quantity pricing from the lowest

$51  = F/100 + V        quantity pricing using the equation P = F/Q +V)

$9 =   F/10 – F/100

$9 =  (0.1 – 0.01)F

$9/0.09 = F

$100 = F

Step 2 Solving for “V” 

$60 = $100/10 + V

$60 = $10 + V

$50 = V

Step 3 Verifying that “F” & “V” are good estimates

What is the price for 50 units using F = $100 and V = $50?

P = F/Q + V

P = $100/50 + $50 = $2 + $50 = $52

The Fixed and Variable Costs determined by this method are not necessarily the supplier’s actual fixed and variable costs but are reasonable estimates to focus the negotiations.

Using Analytical SourcingApps, an inexpensive “Add-Ins” for popular spreadsheets, all of the permutations and combination for the quotation are calculated to uncover fixed and variable costs. In addition, outliers that are not logical given the calculations are exposed.  SourcingApps supports analytical sourcing professionals and provides powerful calculators to illuminate negotiations.

*Kuzdrall, P. J., & Britney, R. R. (1991). Chapter 5 `Calculating Fixed and Variable Components. In Price and Discount Schedule Analysis: A guide for Purchasing, Marketing, Materials, and Financial Managers. essay, Quorum Books.

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