Definition of variable cost percentage

figure that equals total variable costs divided by total sales. Labor-intensive companies have a higher variable cost ratio than capital-intensive ones. If product demand declines, it is very difficult to cut the labor and raw materials (variable costs) required to produce each unit of product. It is easier to reduce fixed costs (layoff of a foreman or personnel department employee, etc.). Variable costs per unit are usually reduced through automation (increasing fixed costs). For example, if variable costs are $150 and total sales are $600, the ratio is .25.