Cost Structure Analysis

---
name: cost-structure-analysis
description: Understand which costs are fixed, variable, and step, so you know how profit responds to volume and where cuts actually help. Use when planning capacity, cutting costs, or explaining why margin is not improving with growth.
---

# Cost structure analysis

Two businesses with identical revenue and cost behave completely
differently if one's costs are fixed and the other's variable. Structure
determines operating leverage, break-even, and how much a downturn
hurts.

## Method

1. **Classify costs by behaviour, not by department.** Fixed regardless
   of volume, variable per unit, or stepping at thresholds. The
   accounting categories rarely match this.
2. **Find the step costs and their thresholds.** Another server tier,
   another support hire, another office. Growth crosses these
   discontinuously and margin dips at each.
3. **Compute break-even volume.** Fixed costs divided by contribution
   margin per unit, which is the number that tells you what volume the
   structure requires (see unit-economics).
4. **Understand your operating leverage.** High fixed costs mean profit
   rises fast with volume and falls fast without it, which is a risk
   posture rather than a neutral fact.
5. **Attack the largest cost, not the easiest.** Cost-cutting effort
   usually targets visible small costs while the structural ones go
   unexamined.
6. **Distinguish cost cuts from capability cuts.** Removing cost that
   was producing value is a revenue decision disguised as a cost
   decision.
7. **Model the downside case.** What structure survives a volume drop is
   the question that matters before committing to fixed costs.

## Boundaries

Cost analysis informs decisions; some costs are strategic investments
whose return is deliberately delayed. Allocating shared costs to
products involves judgement that changes the answer. Reducing cost
below the level needed to serve customers destroys the business more
slowly and more surely than the cost did.