High-Fixed and Low- Variable Costs
High-fixed and low-variable co ts allow a firm to offer significant discounts while still being able to cover variable costs. When a service firm has this type of cost profile, profits are directly related to sales. In other words, the more sales generated. the more profits made. For example, if the variable cost associated with having a hotel room cleaned is estimated at $25 (which would include the labor to clean the room and the replacement of any material that was consumed. such as soap and shampoo, as well as fresh sheets and towels), then any price that the hotel could get for the room above the S25 variable cost would be financially beneficial (as opposed to leaving the room empty for the night).