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Structure of costs in profitability cases: OPEX & CAPEX vs Fixed costs and variable costs

Someone asked on Oct 09, 2018 - 2 answers

Hello everyone,

I was wondering which certain ocst structure you are using for profitabilty cases?

The way I used to split costs was:

Variable costs(= costs per unit): Material, labour per hour (wages), manufacturing costs (electricity, R&D, delivery)

Fixed costs: Rent, Investment costs (Capex), Depreciation, Taxes, Utilities, personnel (salaries)

I faced an issue when I was trying to solve the case of Innogy Consulting ("Smart Meters") and segmented costs for fixed and variable costs for Innogy Consulting here on this forum: In the Innogy case, cost structure is splitted in:

  • Capex
    • Cost per power Smart Meter
    • Cost per gas Smart Meter
    • Cost for IT infrastructure per household/commercial property
    • Cost for telecoms infrastructure per household/commercial property
    • Installation cost: assumed 10% of overall Capex
  • Opex
    • Smart Meter maintenance costs per month and meter
    • IT maintenance costs p.a. of IT related Capex
    • Telecoms maintenance costs per month and household/commercial property

Here CAPEX is clearly a variable cost structure for me as it depends on the units produced same as OPEX costs, however in my previous strutcre i defined CAPEX as something occuring once initially (e.g. purchase of plant, upgrading of machine etc.).

For further information I did research on the Internet however I found out the following components for CAPEX and OPEX:

i) CAPEX = Investment costs (new machine, extention, technical upgrade)

II) Operating cost = COGS (cost for raw materials, labor costs, storing costs, units sold) + Operating expenses (taxes, depreciation, rent, R&D, advertisement, maintenance)

Hence, I am confused what would be the best approach for segmenting costs and would like to ask for your advice.

Thanks a lot in advance!

Best

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Dennis replied on Oct 09, 2018

Here is my take:

The case you are referring to is a question on whether or not to invest; so it's not a pure profitability problem. You want to analyse whether it is good to switch to Smart Meters so your strategy should be to compare the operating costs (the costs in the profitability framework) in the new situation with the current operating costs, and decide whether it is worth the money it costs to invest. Of course while also keeping other things in mind like if competitors will do it, and other possible up- or downsides to changing operations.

Jason replied on Oct 09, 2018

Generally, a good approach is to just ask: "How are the relevant costs broken down? Some examples might be... x, y, z." In this case, 9 times out of 10 they'll give you the proper cost structure/segmentation. You provide examples so you show them you're thinking, and not just asking for the answer, which makes the interviewer more comfortable sharing the information.