Emerson Smith, sales director for a beverage wholesaler, analyzed whether his company should attempt to become beverage supplier next year for TopChoice, a national fast food chain. Emerson learned that Deluxe Beverages, Inc., currently has a supply contract with TopChoice that has three more years in its term; TopChoice would have to pay Deluxe Beverages $3 million to terminate the supply contract early. Also, Deluxe Beverages has installed automated beverage ordering software in TopChoice's home office; TopChoice would have to spend $1 million to replace the software and retrain its staff. Emerson concluded that TopChoice's ________ costs would be too high to seriously consider a change in supplier during the multi-year term of the supply contract, so he decided not to attempt to become TopChoice's beverage supplier next year.

Question

Quizplus · Accepted Answer

The costs that TopChoice would incur to terminate the supply contract with Deluxe Beverages and to replace the automated beverage ordering software are switching costs. These costs would be too high for TopChoice to seriously consider switching to a new supplier during the term of the contract. Therefore, Emerson decided not to attempt to become TopChoice's beverage supplier next year. The other options (capital, operating, labor, and cooptation) do not accurately describe the costs discussed in the scenario.

Emerson Smith, Sales Director for a Beverage Wholesaler, Analyzed Whether