Hi Carlos,

so far that you want to divide in fix and variable costs only, you can use the concept of marginal change in the output. Specifically, you can consider a cost variable if they increase with a marginal change in the output of the product. Thus all the costs that change with a marginal change in the output (raw material for example) can be considered variable. On the other hand, costs that do not change with a marginal change in output (as labour or real estate) can be considered fixed.

To be more accurate though you should introduce the concept of semi-fixed costs. These are costs that do not change with a marginal change in output, but can change if there is a significant enough increase in production. Assuming you have a graph with output on the horizontal axis and cost on the vertical axis, they are graphically represented by increase by steps.

Thus, the most appropriate definition would include the following:

• Variable costs: change with a marginal change in output
• Semi-fixed costs: do not change with a marginal change in output, but can change so far that there is a big enough increase in output
• Fixed costs: never change, whatever the output

Hope this helps,

Francesco

I actually think you can use the same logic that you use for a manufacturing case - you can only increase production so much before you have to invest in more tooling and real estate. What I would do is to identify how many incremental customers a rep or a server can handle and based on that and what the solution of the case is consider these costs either variable or fixed costs. For example if business is a food delivery service and your ideas to increase revenues results in an increase of revenues of 20% and current service reps have spare capacity of 25% and delivery team has spare capacity of 5%, I would consider service reps as fixed cost and delivery team as variable (then you can further distinguish between salaries, delivery vehicles, gas and mileage).

hope it helps,

andrea

Hey anonymous,

A way of dealing with the type of costs that you presenting is to call them by their proper name: semi-fixed (or semi-variable) costs, i.e., their graph looks like a leather, as they are fixed for a certain amount of work/clients/capacity, but then if you want to expand further they become higher. This might seems a very technical discussion, but interviewers might expect from everyone who had studied accounting before to be able to discuss about it.

Best

Bruno

Hi,

For service industries I will use the following:

• Labor - mainly fixed. Variable in special cases like 2-sided markets (e.g. taxi business)
• Marketing - Mainly fixed. Variable in case of discounts / subsidizing per order
• Supplies, distribution - variable
• Rent, tools, etc - Fixed

Best