At&T Wireless: Text Messaging

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ACCT 503 – AT&T Case

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
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How strong a relationship should exist between the prices charged to a customer for a good or service and the cost of providing that good or service?

We think that companies should calculate their break-even point for their goods and services and to charge the prices according to that figure. This way, they can make sure that their price covers their expenses. In case of AT&T’s text messaging they are charging much more than the cost. But because there are only four national carriers in United States and they control 90 percent of the market, and text messaging had become widely popular, they can afford high prices. They are considering the demand of the service and pricing the product according to demand and supply.

5. Why is the price that AT&T charges to transmit a kilobyte of data via text message so much higher than the price charged to transmit a kilobyte of data via a Smartphone?

The fastest growing wireless industry is text messaging. This also reflects the earlier comment that demand for messaging far exceeds supply, therefore driving prices up. Even though it costs less to transmit a text message than data, it is still seen as a very low cost to the average customer. The customer feels like they are getting a good deal because they are using the text messaging more than the data
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