1. Describe the cost behavior in the wireless industry. What are the implications of this cost behavior for cost-volume-profit (CVP) relationships?
The term cost behavior is used to describe whether a cost changes as output changes. In this case the costs are tightly shielded. In order to describe the cost behavior of the industry, we have to study the process that results in cost incurrence. Based on the information in the AT&T case, the industry features a high proportion of fixed costs in relation to acquiring spectrum and building a network. Variable costs are relatively low and, in the case of text messages, are very low. The cost structure in the wireless industry is dominated by fixed costs, so the contribution margin ratio is high. The high fixed costs and large contribution margin ratio result in a relatively high percentage increase in profit. The greater the proportion of fixed costs in a firm’s cost structure, the greater the impact on profit will be from a given percentage change in sales. The wireless industry has high operating leverage, because of high fixed costs and low variable costs. Therefore, the industry has a high ability to generate an increase in net income when sales revenue increases. “Text messages did not use any extra spectrum – once the carrier had paid the cost of the underlying infrastructure and storage equipment. Any revenue received by the provider on incremental text message usage is almost pure profit”. So, we can assume that, the cost does not change as the output changes. As far as I understand, the costs are incurred when the message is actually sent, and all these cost are very low.
2. What are the key cost drivers? Can a cost driver be used to continually raise prices?
Cost drivers 1. Number of text messages per minute 2. Number of cell towers per area covered 3. Number of databases needed for a certain volume of messages 4. Number of customers 5. Number of cell