Salem Telephone

Salem Telephone Company ("STC")

Question 1

Variable Costs
Equipment costs: Power
Wages and Salaries: Operations hourly personnel

Fixed Costs
Space costs: Rent, custodial services

Equipment costs: Computer leases, maintenance, depreciation of computer equipment and office equipment / fixtures

Wages and Salaries: Operations salaried staff, systems development and maintenance, administration, and sales

Sales promotions
Corporate services

The group actively debated fixed versus variable labor expenses based on our own industry experience, but used our interpretation of the reading to come to our final conclusion. We considered costs to be variable if the expenses on the income statement were directly influenced by revenue hours on Exhibit 1 in the case.

Question 2

- Power cost per revenue hour is $4.70/hr
- Operations hourly personnel: $24.00/hr

Variable cost per revenue hour is $28.70/hr

Question 3

- Price per unit is $400/hr internal and $800/hr external
- Intracompany contribution margin: $371.30/hr
- Commercial contribution margin: $771.30/hr

Assume STC will fully utilize their allowable hours. The next allowable hour will be a commercial hour; therefore we consider the contribution margin to be the commercial contribution margin of $771.30/hr.

Question 4

Break-even occurs when revenue equals costs so we used the following equation:

Revenue = Variable Costs + Fixed Costs
205(400) + X(800) = (X+205)(28.7) + 212,939
X = 177.39 commercial hours sold to break-even

Question 5

March basis:
PS=Producer Surplus = $110,000
P=Net Income=($23,700)

Option a: P=205(400)+1000(96.6)-301.6(28.7) +212,939 P=82,000+96,600-8,384-212,939 P= -(42,723) PS=$96,600 – per graph a in Appendix Conclusion: Do not execute

Option b: P=82,000+600(179.4)-(384.4)(28.7)-212,939 P=82,000 +107,640-11,032-212,939 P= -(34,331) PS=$107,640 – per graph b in Appendix Conclusion: Do not execute