What is considered a variable cost in a business model?

Variable costs are expenses that fluctuate in direct proportion to the volume of goods or services produced by a business. These costs change based on the level of production or sales activity. The cost of shipping, often referred to as freight or logistics costs, is considered a variable cost because it can vary significantly depending on the number of products shipped. For instance, if a business sells more products, it will incur higher shipping costs, whereas fewer sales would lead to lower shipping expenses.

In contrast, rent is typically a fixed expense that remains constant regardless of the production levels. Similarly, utilities like electricity may have fixed components but can be influenced by usage, making them semi-variable. Insurance is generally a fixed cost, as businesses pay a consistent premium over time regardless of their production volume. Thus, the cost of shipping stands out as the correct answer, exemplifying how expenses can vary with operational activity in a business model.