Prestige Telephone Company
The following questions are intended to guide you in the identification of important case issues (these are similar to the assignment questions at the end of the case).
1) Identify which of Prestige Data Services’ costs are variable, fixed, or mixed (recall that for a mixed cost, total costs = fixed costs + (variable cost per unit of cost driver x units of cost driver)). For variable costs, estimate variable costs per unit of cost driver (note that the cost driver may not be the same for every variable cost, so use caution in further analyses; in some instances, after you consider what the cost driver is, you may change your mind and reclassify the cost as mixed or fixed). For mixed costs, estimate the portion that is fixed and the portion that is variable (recall algebra classes, in which you can estimate the mixed cost formula by solving two equations with two unknowns).
2) Will the transactions between Prestige Data Services and Prestige Telephone be relevant to all of your analyses?
Why or why not?
3) Assume that internal company demand must be met before any commercial sales can be made (i.e., Prestige Data
Services will receive revenue and incur variable costs based on hours used by Prestige Telephone). What level of commercial sales of computer use does the company need to break even each month?
4) Complete a cost-volume-profit (CVP) analysis (i.e., analysis of sales, variable costs, and fixed costs) for each of the four alternative courses of action for rescuing the data processing operation (these are discussed briefly at the end of the case description and are reviewed in questions 3a-3d at the end of the case). Which option(s) is (are) the most lucrative business choice(s)? Should Ms. Bradley and Mr. Rowe adopt any of these options? NOTE: For each of these analyses, you need only compute the change in income for one month to assess the alternatives, but to do so you’ll need to make an assumption about the baseline numbers to use (i.e.,
1) Identify which of Prestige Data Services’ costs are variable, fixed, or mixed (recall that for a mixed cost, total costs = fixed costs + (variable cost per unit of cost driver x units of cost driver)). For variable costs, estimate variable costs per unit of cost driver (note that the cost driver may not be the same for every variable cost, so use caution in further analyses; in some instances, after you consider what the cost driver is, you may change your mind and reclassify the cost as mixed or fixed). For mixed costs, estimate the portion that is fixed and the portion that is variable (recall algebra classes, in which you can estimate the mixed cost formula by solving two equations with two unknowns).
2) Will the transactions between Prestige Data Services and Prestige Telephone be relevant to all of your analyses?
Why or why not?
3) Assume that internal company demand must be met before any commercial sales can be made (i.e., Prestige Data
Services will receive revenue and incur variable costs based on hours used by Prestige Telephone). What level of commercial sales of computer use does the company need to break even each month?
4) Complete a cost-volume-profit (CVP) analysis (i.e., analysis of sales, variable costs, and fixed costs) for each of the four alternative courses of action for rescuing the data processing operation (these are discussed briefly at the end of the case description and are reviewed in questions 3a-3d at the end of the case). Which option(s) is (are) the most lucrative business choice(s)? Should Ms. Bradley and Mr. Rowe adopt any of these options? NOTE: For each of these analyses, you need only compute the change in income for one month to assess the alternatives, but to do so you’ll need to make an assumption about the baseline numbers to use (i.e.,