Variable costs fluctuate with production volume - e.g., raw materials and delivery costs. Fixed costs such as rent and insurance remain constant regardless of output. In negotiations, suppliers may inflate fixed cost allocations to justify pricing; buyers should differentiate between fixed and variable costs to challenge pricing more effectively. Recognising true variable costs also allows negotiating for volume-related discounts.
Reference: CIPS L4M5 (2nd ed.), LO 2.2 - Cost structure: variable vs fixed costs in pricing analysis.