1) Describe the cost behavior in the wireless industry.

What are the implications of this cost behavior for cost-

volume-profit (CVP) relationships?

At AT&T the costs remain relatively unchanged because the company’s costs are primarily fixed costs with very
low variable costs. This provides the company with a lot of operating leverage so long as they can cover their
fixed costs, any volume increases above it is pure profit to the company. This also means that if the volume
decreases beyond the fixed costs, then every decrease in volume yields proportionally equal losses.

Cases stated that text messaging comes with very little variable cost (few cents per text). If AT&T can cover the
cost of required infrastructure to facilitate text messages, any revenues earned from text messages are virtually
pure profit.

2) What does it cost AT&T to send a text message? What are the key cost drivers? Based on this cost, what is
AT&T’s profit margin as a percentage of its short message service (SMS) text messaging business?

Key cost drivers of the industry:

 Number of texts sent per minute
 Number of customers handled by the carrier
 Number of cell towers in the area
  Amount of database storage needed to handle the messages
 Individual cell phone plans
 How many decides that are currently handled by the carrier in a given area
This case the primary cost driver is number of texts per voice minute. Because the industry is characterized by
high fixed costs and low variable costs, and because variable/fixed cost are based on the behavior of cost as
volume fluctuates, any changes in volume will have little to no effect on AT&T’s costs. Any volume changes above
the fixed costs will not incur more variable cost and thus cost drivers are unlikely to raise prices; ultimately, these
volumes will increase the AT&T’s profit margins significantly.

3) How strong a relationship should exist between the price charged to a customer for a good or service and the
cost of providing that good or service? What issues related to the wireless industry might be of interest to
theS. Senate Antitrust Subcommittee?

Prices should at least cover the cost of the product in order for the company to break-even. Any amount greater
than that will translate into pure profits. AT&T should price their products based on the supply and demand of
the given products. For text messaging, the demand is massive and AT&T gauges their prices accordingly.

Cost of sending a text message for AT&T is infinitesimal compared to prices that we pay for this service. But
honestly, as long as we remain willing to pay the price for this service, they will continue to charge us.

4) What is the price that AT&T charges to transmit a kilobyte of data?

$0.02826 dollars/kb
The price of text messaging is higher than simply transmitting data by smartphone largely because of supply and
demand. The wireless industry prices their products based on demand. Currently, the demand for text messaging
is high and still growing. Because of this, prices remain high. Perhaps if the average consumer was more aware of
the cost of texting this would change their preferences and cause the price to ultimately drop. Texts are not the
only source of revenue for the wireless industry. E.g. revenues from sales of devices such as cell phones. The
industry prices their devices in order to compete with others in the industry and this leads to low prices in the
device market. The revenue from texts is used to offset the loss of potential revenues in the device market.