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At&T Text Messaging Case

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AT&T TEXT MESSAGING CASE QUESTIONS

1. Describe the cost behavior in the wireless industry. What are the key cost drivers? What are the implications of this cost behavior for cost-volume-profit (CVP) relationships?
The cost behavior is difficult in the wireless industry because the key components making up the costs for texting and wireless calls are the same. While there has been an increase in the number of text messages sent, almost to the point where more time is spent texting than calling, it’s hard to differentiate how the costs should be split. The key cost driver’s include several factors ranging from the fixed costs of infrastructure (purchasing servers, cell towers, etc), services (billing, accounting, maintenance, etc), and variable costs (storage on servers). The implications of the CVP is that it is difficult to determine what portion of the fixed/variable costs are associated with texting vs. other cell phone operations that use all of the same cost drivers.

2. What kinds of margins does text messaging produce?
It’s difficult to say exactly what type of margins texting produces, but I think that the best way to determine it would be to allocate a weighted-average contribution margin to determine the approximate number. The fixed costs such as servers should have a 90/10 allocation because text messages take up little bandwidth, but all other costs should be allocated 50/50 because the total income from the two operations seems to be about equal.

3. As we move to a service economy, can we expect to have more or fewer businesses with cost behaviors similar to those in the text messaging sector?
We will continue to have more businesses with similar cost behaviors services because it is harder to determine exactly when the services start and stop. Billing time becomes an issue and recording is much more variable in the service

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