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Fixed costs do not vary with production whereas variable costs rise as output increases. In the Huxley case, no fixed costs are associated with the subcontracting arrangement. If the firm decides to go with the shelter operation, fixed costs include construction, site leasing, startup expenditures, the plant manager’s salary, corporate taxes, and various other miscellaneous expenses...

Variable costs include the hourly wage, materials, and transportation costs. The wholly-owned subsidiary includes most of the same fixed costs as the shelter operation, but adds the consulting fee and Mexican legal fees.

Sometimes the distinction between fixed and variable costs can become blurred. For example, is the salary of an economics professor a fixed cost or a variable cost? Presumably, your professor will be paid the same salary regardless of how many students enroll in the course...

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