Map
Put every dollar of cost in one tree.
- Split
- By value chain or by line item
- Test
- Adds up to total cost
Cost reduction case interview, framework and a worked case
A cost reduction case asks where a client can cut costs and by how much, usually against a target and without hurting sales. Map every cost into a tree, split fixed from variable over the time you have, benchmark each big bucket against the best units and the industry, then size each lever net of what it costs to put in place. Finish with the few cuts that hit the target, in order, and the risk to revenue. Soreno, an AI voice interview practice app for consulting, investment banking and other finance candidates, runs a free profitability case with no sign-up, where you find which cost line moved and size the fix, and full mock cases with scored feedback.
Updated
- The question
- Cut X without hurting Y
- A target, a deadline and something the client won't trade away
- First split
- Fixed vs variable
- Judged over the decision's time frame, not the accounts
- Worked case
- $20 million to find
- An invented grocery chain, every number shown
- Free practice
- No sign-up
- A full profitability case with a timer
What is the framework for a cost reduction case?
A cost reduction case is the cost half of a profit problem with the revenue side held fixed. If profit fell because sales fell, you are in a profitability case instead, and our profitability framework covers that split. Here the client already knows the answer is cost. Your job is to find the few lines where a cut is large, real and safe, and to prove the total reaches the goal.
Classify
Fixed or variable over the time you have.
- Variable
- Moves with volume
- Fixed
- Moves only with a decision
Benchmark
Compare each big bucket to something.
- Inside
- Best store, plant or team
- Outside
- Rivals or sector data
Size and sequence
Savings net of cost to achieve, in order.
- Check
- Total clears the target
- Guard
- Sales and quality hold
Worked example: Harbor Market (ours)6 steps
Harbor Market, an invented grocery chain with 50 stores and $1 billion of sales, earns an operating margin of 1%. The CEO wants 3% within a year without losing sales. Where should the cuts come from? This case and every number in it are invented by Soreno for practice.
Size the target
$20 million a year
Sales are $1 billion and costs $990 million, so profit is $10 million, a 1% margin. A 3% margin on flat sales means $30 million of profit, so the chain must take out $20 million of cost, about 2% of the base. Confirm the deadline (one year) and the constraint (no lost sales) before anything else.
Map and classify
91.9% of cost moves with volume
Goods sold $760 million (purchases of $730 million plus $30 million of shrink, the stock lost to spoilage and theft), store labor $110 million, distribution $40 million, occupancy $50 million and head office $30 million. Over one year, leases and head office costs are fixed. Goods, labor hours and trucks flex with volume. So $910 million is variable and only $80 million fixed: the money is in buying and in the stores, not at head office.
Benchmark outside
Goods cost 76% of sales against 73.69%
Aswath Damodaran's Margins by Sector table at NYU Stern puts cost of goods at 73.69% of sales for US grocery and food retailers (15 listed firms, data as of January 2026). Harbor runs at 76%, a gap of 2.31 points, or about $23.1 million. Listed chains differ in size and count costs their own way, so treat this as a pointer to purchasing and shrink, not a target.
Benchmark inside
Store labor runs from 9.5% to 12.5% of sales
Each store sells $20 million. 15 stores spend 9.5% of sales on labor, 20 spend 11% and 15 spend 12.5%, 11% on average. Scheduling the costliest 15 stores to the middle group's ratio saves 15 × $20 million × 1.5% = $4.5 million. Shrink tells the same story: 3% of sales chain-wide, 2% at the best ten stores.
Size each lever
$23.8 million against $20 million
Purchasing $7.3 million a year for $1 million once, shrink $5 million a year for $3 million once, store labor $4.5 million a year for $2 million once, distribution $4 million a year for $1 million once, head office $3 million a year for $2 million once. Purchasing is 1% of purchases from renegotiating and consolidating suppliers, shrink comes down to 2.5% of sales, trucks and head office each give 10%. The total clears the target by $3.8 million (19% spare), and $9 million of one-time cost pays back in about 5 months.
Recommend
Purchasing and shrink first
Start with purchasing and shrink: together $12.3 million, 62% of the target, and neither touches the shelf. Then store labor scheduling, trucks and a zero-based review of head office. Leave rent alone until leases come up, and don't close stores, since that breaks the no-lost-sales rule. Margin goes from 1% to about 3.4% if all five land. The main risk: labor cuts that lengthen checkout lines and cost sales.
How to build the cost tree4 ways to split
Pick the split that matches how the client spends money, say why, and make sure the branches add up to total cost.
Fixed and variable
The default first cut
Yale's Office of Career Strategy defines fixed costs as those that stay constant regardless of a company's activity and variable costs as those that vary with sales, with rent and raw materials as its examples. In a case, decide it over the decision's horizon: a lease is fixed for a year and variable over ten. Some costs are semi-variable, like store labor, with a fixed core of staff and hours that flex with traffic.
Variable costs
Volume × cost per unit
Each variable line is units times cost per unit, and cost per unit is price paid times how much is used. That gives you three questions for every line: buy it cheaper, use less of it, or need fewer units.
Value chain
Buy, make, move, sell, support
For a manufacturer or retailer, follow the product: materials, production, logistics, selling and overhead. It shows where cost piles up and which team owns it.
Total cost of ownership
Buying and running an asset
When the client is choosing equipment, add purchase price and running costs over the asset's life. McKinsey's Talbot Trucks practice case gives you the major cost drivers of buying and operating one diesel truck, which it calls total cost of ownership, and asks how a diesel truck and an eTruck compare.
The main cost levers7 levers
Every lever below is a way to pay less per unit, use fewer units or stop the activity. Size each one before you rank them.
Purchasing
Pay less for what you buy
Renegotiate, consolidate suppliers, change specifications or switch materials. Usually the biggest pool in goods-heavy businesses.
Labor productivity
Same output with fewer hours
Scheduling to demand, spans of control, overtime and automation. Benchmark units or sales per labor hour across sites first.
Waste and quality
Stop paying twice
Scrap, rework, spoilage, returns and theft. Cheap to fix when one site already does it well.
Footprint
Fewer, fuller sites
Close, merge or sublet plants, warehouses and offices. Large but slow, with one-time costs and a risk to service.
Make or buy
Outsource or bring back in
Compare the full cost of doing it yourself with a supplier's price, then weigh control and risk.
Demand
Need less of it
Fewer reports, fewer SKUs, less rush freight. BCG's zero-based budgeting article says the goal is to recognize the causes of spending, not just cut it.
Zero-based budgeting
Justify every line from zero
Bain describes zero-based budgeting as a blank sheet of paper approach that starts from a budget of zero and requires managers to justify every expense item kept. BCG says the final question is whether a cost supports the company's strategic goals.
What firms and schools publish on costOfficial pages
No firm we checked publishes a cost reduction case framework on its careers pages. These are the pieces they do publish.
Accenture
Ask for the cost structure
Accenture's case workbook lists "What are the components of the company's cost structure?" among the questions to ask in a sample case, then works a break-even: margin per unit, fixed costs, divide.
McKinsey
Cost drivers, no calculator
The Talbot Trucks case compares the total cost of ownership of a diesel truck and an eTruck, and its hints say calculators are not allowed.
BCG
Savings of 10% to 30%
BCG's December 2022 article says it has seen zero-based budgeting deliver gross savings of between 10% and 30% of costs. That is BCG's experience with clients, not a target to use in a case.
NYU Stern
Sector cost ratios
Damodaran's Margins by Sector table gives cost of goods, R&D and SG&A as a share of sales for each US industry, updated with data as of January 2026. Useful for a quick outside check.
From Yale Office of Career Strategy: The Case Interview, McKinsey: Talbot Trucks practice case, Accenture: Case Interview Workbook (PDF), Bain: Zero-Based Budgeting, BCG: The Zero-Based Approach to Smarter Spending (2022) and NYU Stern, Damodaran: Margins by Sector (US).
What do interviewers listen for in a cost case?
In our experience, the candidates who do well treat it as a hunt for a number, not a list of ideas. These are the moves we listen for.
Pin down the target and the limits
How much, by when, and what can't be touched (sales, quality, safety, jobs). The same list of cuts is right or wrong depending on the answer.
Go where the money is
Rank the buckets by size before you brainstorm. A 10% saving on a small line rarely beats 1% on the largest one.
Benchmark before you guess
Ask how the best site, last year or the industry compares. The gap is your first estimate of what is possible.
Net out the cost to cut
Severance, new systems and contract exits cost money once. Say the payback, not just the yearly saving.
Close on a sequence
Which cuts first, what they add up to, and what could hurt revenue. Then the next step.
7 practice questions with a cost reduction step
Each one asks where the cost is and how much can come out. Under each is what a strong answer does.
Cost cases
The client already knows the answer is cost.
A clothing retailer needs to cut costs by 10% without hurting sales. Where would you look?
Sizes the cost buckets first, then benchmarks stores against each other and protects the costs that drive sales, such as floor staff in peak hours. Practice it, see a model answer
A packaging manufacturer's cost per unit has risen 15% in two years. How would you find the cause?
Splits cost per unit into price paid and usage for each input, and checks whether volume fell so fixed costs spread over fewer units. Practice it, see a model answer
A carmaker is deciding whether to keep making a key component in-house or buy it from a supplier. How would you approach it?
Compares the full cost of making it, including the fixed costs that would really go away, with the supplier's price, then weighs quality, control and risk. Practice it, see a model answer
A regional hospital system must take $40 million out of non-clinical costs in two years. Where would you start?
Maps non-clinical spend by function, benchmarks each hospital against the system's best, and keeps anything that touches patient safety out of scope.
Cost as one branch
A profit question where cost turns out to be the answer.
An airline's profits are falling even though it is carrying more passengers. What is going on?
Checks revenue per passenger and cost per passenger separately, then finds which cost per seat rose, such as fuel or crew. Practice it, see a model answer
Your client is a regional grocery chain. Profits are down 20% over two years. How would you structure the problem?
Splits profit into revenue and cost before going deep, and only then benchmarks the cost lines that grew faster than sales. Practice it, see a model answer
One of your client's three divisions is losing money. Should they fix it, sell it or close it?
Sizes how much of the loss a cost program could close, and what costs would stay behind if the division were sold or shut. Practice it, see a model answer
Common mistakes in cost reduction cases
These are the ones we hear most in practice cases.
Cutting every line by the same percentage
It is easy to say and almost never right. Fat sits in a few places. Benchmarks tell you where.
Cutting costs that bring in sales
Store staff at the checkout, sales reps, product quality and marketing that works. Ask what each cut does to revenue.
Ignoring the one-time cost
A $5 million saving that needs $15 million of severance and systems takes three years to pay back. Say so.
Calling a cost fixed because the accounts do
Rent is fixed this year and negotiable at renewal. Classify by what can change within the client's deadline.
Benchmarking unlike things
A store in a city center and one on a highway have different labor and rent. Compare like with like, or adjust.
Stopping at a list of levers
Ten ideas with no numbers do not answer the question. Size three, show they add up and stop.
Find the cuts out loud
Soreno's AI interviewer runs a full case, gives you the cost data when you ask for it, questions your benchmarks and scores the session. Start your free week.
Questions people ask
What is a cost reduction case interview?
A case where the client wants lower costs, usually by a set amount or percentage, by a deadline and without hurting sales or quality. You find where the cost sits, which lines can come down, by how much, and in what order.
What is the best framework for a cost reduction case?
A cost tree that adds up to total cost, split fixed against variable or along the value chain, then a benchmark for each large branch and a sized list of levers. Choose the split that matches how the client spends money and say why.
How is a cost reduction case different from a profitability case?
A profitability case starts with a profit fall and asks whether revenue or cost caused it. A cost reduction case starts with cost as the answer and asks how much can come out. Our profitability framework page covers the first.
What are the main cost reduction levers?
Purchasing, labor productivity, waste and quality, footprint, make or buy, demand reduction and zero-based budgeting. Each one pays less per unit, uses fewer units or stops the activity.
How do you benchmark costs in a case interview?
Three ways: against the client's own best unit (store, plant, team), against its own past, and against rivals or sector data. Ask which the interviewer has. Internal benchmarks are usually the most like for like.
What is zero-based budgeting?
Bain describes it as a budgeting method that starts each period from zero and makes managers justify every expense they keep, instead of adjusting last year's budget. BCG adds that the test is whether each cost supports the company's strategy.
Should I suggest layoffs in a cost case?
Only if the numbers point there and the client allows it. Say the saving, the one-time cost, the effect on service and sales, and what you would try first, such as scheduling or overtime.
How much cost should a company cut?
Whatever closes the gap to the client's goal, with some spare for cuts that fall short. In our worked case the levers clear the target by about a fifth. In our experience, that is a reasonable cushion to aim for.
Keep going
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