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Can employee wages be a component of the variable cost?

Ankit Khandelwal asked on Jul 22, 2019 - 3 answers

One of the feedback I received post my practice case was to include wages as a component of the variable cost. The case was focused on the manufacturing sector and it did touch upon the aspect of the seasonal demand at the later stage. However, without the information of existing production capacity and any proper inputs on the seasonal demand, I really did not see how it can be done.

1) If we are running the plant at 70-80% capacity, there is always a scope to ramp-up production to meet the demands using the existing staff (fixed paid employees). If the demand is too high then we may need to hire additional staff to run the plant beyond the normal working hours. It can be an assumption that the company has permanent employees on a fixed pay-roll. Or will that be a clarifying question to the interviewer?

But this feedback also gave me a reason to think further. Some sectors (healthcare, defense, government sector units) might not be considered as seasonal or variable though others are. For examples:

- IT industry wages currently consist of both fixed and variable components.

- E-commerce too is affected by seasonal demands.

- Agriculture sector too is very much seasonal.

My question is very simple. Should I keep assuming wages as a fixed cost until unless some hint has been given in the case to look for seasonality, variable levels? or this can be a clarifying question to the interviewer should I encounter any of the industries mentioned above in my case interview.

Thanks for the help!

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replied on Jul 22, 2019
McKinsey Engagement Manager & BCG Consultant | Interviewer at McK & BCG for 7 years | Coached 100+ candidates secure MBB offers
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Hi Ankit!

Simple rule: you should not assume anything! Just state that wages can be both fixed or variable, or a combination - depending on the contracts and labor laws. Just quickly clarify with the interviewer which situation prevails, and that's it.

In the long run, all costs are variable anyway.

Cheers, Sidi

Francesco replied on Jul 23, 2019
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Hi Ankit,

as mentioned by Sidi and Vlad, whether the labour cost is fixed or variable is highly dependent on the national regulation (eg France vs US) and the kind of employees you are considering (eg full time vs contractor). As a consequence, you can state your hypothesis on which could be the case, but you should then verify it with the interviewer.



Vlad replied on Jul 22, 2019
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You can have direct and indirect labor. The first one is variable. So in your case labor will be in both fixed and variable costs. You can mention it to the interviewer and ask what's the best allocation.