Salem Telephone Case

1.) "Revenue hours" represent the key activity that drives costs at Salem Data Services. Which expenses in Exhibit 2 are variable with respect to revenue hours? Which expenses are fixed with respect to revenue hours?

Variable: Wages of hourly personnel, Power

Fixed: Rent, custodial services, computer leases, maintenance, depreciation, salaried staff wages, administration, sales, systems development, sales promotion, corporate services

2.) For each expense that is variable with respect to revenue hours, calculate the cost per revenue hour.
a. Wages of hourly personnel
Total wages of hourly personnel/total revenue hours = cost per revenue hour
i. January: 7896/329 = $24 per revenue hour ii. Februrary: 7584/316 = $24 per revenue hour iii. March: 8664/361 = $24 per revenue hour

b. Power
Cost of power/total revenue hours = cost per revenue hour
i. January: 1546/329 = $4.7 per revenue hour ii. February: 1485/316 = $4.7 per revenue hour iii. March: 1697/361 = $4.7 per revenue hour

3.) Create a contribution margin income statement for Salem Data Services. Assume that intracompany usage is 205 hours. Assume commercial usage is at the March level.

Salem Data Services
Contribution Income Total Per Unit
Intracompany Sales (205) 82000 400
Commercial Sales (138) 110400 800
Variable Expenses (28.7 x 319.6) 9844
Contribution Margin 182556
Fixed Expenses 212939
Net Operating Income -30383

Intercompany Sales = 205 x 400 = 82000
Commercial Sales = 138 x 800 = 110400
Variable Expenses = 28.7 x 343 = 9844
Contribution Margin = 192400 – 9844 = 182556
New Operating Income = 182556 – 212939 = -$30383

4.) Assuming the intracompany demand for service will average 205 hours per month, what level of commerical revenue hours of computer use would be necessary to break even each month?
CM Ratio = Contribution Margin/Sales = 182556/192400 = .9488
Break even = Fixed Expenses/CM Ratio = 212939/.9488 = $224429.81

$224429.81 - $82000