AT&T Wireless Case
AT&T Wireless Case – ACCT 503
1. [10 points] Describe the cost behavior in the wireless industry. What are the implications of this cost behavior for cost-volume-profit (CVP) relationships?
Cost behavior is how a company’s costs change given a change in that company’s activities. Variable costs are costs that change proportionately with the changes in a company’s activities. In contrast, the costs that do not change with a change in a company’s activities are known as fixed costs. In the case of AT&T, costs are focused primarily into the fixed category. This means that as the company’s activities shift, its costs remain relatively unchanged. This combination of high fixed costs and low cost variable costs gives AT&T and the rest of the industry a large amount of operating leverage. The high operating leverage of AT&T means that the company utilizes a higher risk strategy which leads to higher profits as volumes increase. Essentially, as long as AT&T maintains a volume that covers at least its fixed costs, any additional volume translates into profit. This works both ways however, if volume decreases below the threshold for covering fixed costs then every decrease in volume yields proportionately equal losses. According to the case, there is little cost associated with text messaging. The case states that text messaging has an incredibly low variable cost, estimated at only a few cents per text. So basically, once AT&T has covered the cost of the required infrastructure to facilitate text messages, any revenues garnered from text message and virtually pure profit.
2. [5 points] What are the key cost drivers? Can a cost driver be used to continually raise prices?
A cost driver is the root cause of why a cost occurs. For AT&T and the wireless industry there are several cost drivers. The most obvious ones in this case would be the number of texts sent per minute and the number of customers handled by the carrier. However, there
1. [10 points] Describe the cost behavior in the wireless industry. What are the implications of this cost behavior for cost-volume-profit (CVP) relationships?
Cost behavior is how a company’s costs change given a change in that company’s activities. Variable costs are costs that change proportionately with the changes in a company’s activities. In contrast, the costs that do not change with a change in a company’s activities are known as fixed costs. In the case of AT&T, costs are focused primarily into the fixed category. This means that as the company’s activities shift, its costs remain relatively unchanged. This combination of high fixed costs and low cost variable costs gives AT&T and the rest of the industry a large amount of operating leverage. The high operating leverage of AT&T means that the company utilizes a higher risk strategy which leads to higher profits as volumes increase. Essentially, as long as AT&T maintains a volume that covers at least its fixed costs, any additional volume translates into profit. This works both ways however, if volume decreases below the threshold for covering fixed costs then every decrease in volume yields proportionately equal losses. According to the case, there is little cost associated with text messaging. The case states that text messaging has an incredibly low variable cost, estimated at only a few cents per text. So basically, once AT&T has covered the cost of the required infrastructure to facilitate text messages, any revenues garnered from text message and virtually pure profit.
2. [5 points] What are the key cost drivers? Can a cost driver be used to continually raise prices?
A cost driver is the root cause of why a cost occurs. For AT&T and the wireless industry there are several cost drivers. The most obvious ones in this case would be the number of texts sent per minute and the number of customers handled by the carrier. However, there