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Profit/ Loss and Profitability Cases

Frank asked on Dec 15, 2017
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It seems to make sense to segment costs using the same criteria to segemnt markets. Has there ever been a case where this was not true?


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replied on Dec 27, 2017
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I find that the best way to segment costs is to group items into sensible categories, usually the biggest cost categories for that particular industry or firm. This has a number of advantages:
1. It shows the interviewer that you are being thoughtful about the particular industry and have developed your own categories in the interview. This is more impressive than blindly applying fixed/variable or some other well-known framework.
2. It avoids confusion that can arise when using 'fixed/variable'. For example, in an airline, is a plane a fixed cost because it is a large upfront capital expenditure, or is it variable because they can be leased and more can be added with increased passengers over the medium term? With fuel, this seems to be a variable cost, yet fuel prices are often fixed in advance through hedging... etc.

For an airline, sensible categories might be aeroplanes, fuel, staff, fees and charges, marketing and sales etc. It doesn't particularly matter if you don't nail it because industry knowledge isn't expected, but the ability to develop your own categories is.

As a final tip, if you can use the value chain to categorise costs, strongly consider it. It's usually quite clear and an easy way to split up costs.

Anonymous A replied on Dec 15, 2017

Use Fixed and Variabel instead.

Vlad replied on Dec 21, 2017
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If you are talking about asking the interviewer re the segmentation first - that is correct.

The particular cost structure may be segmented differently:

  • Fixed and variable
  • Per unit basis
  • Value chain
  • Any other structure that the interviewer may provide.

Ask about the cost structure proactively and then if the interviewer asks you to make a hypothesis re costs - use the most common FC / VC structure


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