Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 54

Executional Cost Drivers, Internet Retailer

Assume that you are a consultant for a start-up Internet retailer, Bikes.com, which provides a variety of bicycle parts and accessories in a convenient and effective customer service approach. The firm operates from an office building and nearby warehouse located in Danville, Virginia. Currently, the firm has 10 permanent administrative staff, 6 customer service representatives who respond to customer inquiries, and 12 employees who pick, pack, and ship customer orders. All orders are placed over the firm’s Web site. An 800 telephone number is available for customer service. The firm’s sales increased at about 20 percent per year in the last two years, a decline from the 50 percent rate in its first three years of operation. Management is concerned that the decline will delay the firm’s first expected profit, which had been projected to occur in the next two years. The firm is privately held and has been financed with a combination of bank loans, personal investments of top managers, and venture capital funding.

Required What specific executional cost drivers are important in this business? How should the firm use them to improve its sales rate?

Step 1 of 2

A cost driver is a variable that affects costs over a given period. There are a cause and effect relationship between change in activity level and change in the total costs.

The diverse companies have different cost drivers conditional on the type of service industry they in.