Salem Telephone Break-Even Analysis
Through our study of Salem Telephone Company (STC), we’re going to analyze whether or not Salem Data Services (SDS) will be a profitable business to keep. We will do so by utilizing break even analysis. Before we can find our solution, we should discuss Salem Data Services’ (SDS) accounting report step by step.
To begin, the various costs incurred to SDS should be grouped into either variable, or fixed. The only variable costs that have any relation to the total revenue hours listed from exhibit 2 are “power” and “Operations: hourly personnel.” Other expenses listed are fixed costs.
Now, we have our data to calculate unit variable cost per revenue hour. | January | February | March | Power | 1546 | 1485 | 1697 | Operations: hourly personnel | 7896 | 7584 | 8664 | Total Variable Cost | 9442 | 9069 | 10361 | Total Revenue Hours | 329 | 316 | 361 | Variable Costs per revenue hour | $ 28.70 | $ 28.70 | $ 28.70 |
The “contribution margin” income statement for SDS therefore is,
Break even analysis: Based on the assumptions above, the number of commercial revenue hours needed to break even is as follows:
(205 * 400 + x *800) -28.7 * (205+x) – 212939=0
82000 + 800x - 5884 - 28.7x - 212939=0
X = 212939 – 82000 + 5884 = 177.39 800-28.7
SDS needs to serve roughly 178 commercial hours to break even.
What if analysis: if commercial price is increased to $1000, the demand reduces
30%. The resulting effect on net income will be:
X = 138 * (1-0.3) = 97
(205 * 400 + 97 * 1000) – 28.7 – (205+97) – 212939 = ($42,606)
If commercial price is reduced to $600, the demand increases
30%. The resulting effect on net income will be:
X = 138 * (1+.03) = 180
(205 * 400 + 180 * 600) – 28.7 – (205+180) – 212939 = ($33,989)
Increased promotion would increase revenue hours by up to 30%
How much could be spent and still leave SDS with no reported losses each month?
X = 138 * (1+.03) = 180
To begin, the various costs incurred to SDS should be grouped into either variable, or fixed. The only variable costs that have any relation to the total revenue hours listed from exhibit 2 are “power” and “Operations: hourly personnel.” Other expenses listed are fixed costs.
Now, we have our data to calculate unit variable cost per revenue hour. | January | February | March | Power | 1546 | 1485 | 1697 | Operations: hourly personnel | 7896 | 7584 | 8664 | Total Variable Cost | 9442 | 9069 | 10361 | Total Revenue Hours | 329 | 316 | 361 | Variable Costs per revenue hour | $ 28.70 | $ 28.70 | $ 28.70 |
The “contribution margin” income statement for SDS therefore is,
Break even analysis: Based on the assumptions above, the number of commercial revenue hours needed to break even is as follows:
(205 * 400 + x *800) -28.7 * (205+x) – 212939=0
82000 + 800x - 5884 - 28.7x - 212939=0
X = 212939 – 82000 + 5884 = 177.39 800-28.7
SDS needs to serve roughly 178 commercial hours to break even.
What if analysis: if commercial price is increased to $1000, the demand reduces
30%. The resulting effect on net income will be:
X = 138 * (1-0.3) = 97
(205 * 400 + 97 * 1000) – 28.7 – (205+97) – 212939 = ($42,606)
If commercial price is reduced to $600, the demand increases
30%. The resulting effect on net income will be:
X = 138 * (1+.03) = 180
(205 * 400 + 180 * 600) – 28.7 – (205+180) – 212939 = ($33,989)
Increased promotion would increase revenue hours by up to 30%
How much could be spent and still leave SDS with no reported losses each month?
X = 138 * (1+.03) = 180