Salem Telephone Case Summary

Salem Telephone Case

1) Which expenses are variable and which are fixed with respect to revenue hours? Variable Fixed Power Rent Hourly personnel Custodial Services Sales promotion Computer leases Corporate services Maintenance Depreciation expenses - computer and office Salaried employees Systems development Sales 2) For each expense that is variable, calculate the cost per revenue hour. Power Personnel Sales Promotion Corporate Services January 1,546 7,896 7,909 15,424 February 1,485 7,584 7,039 15,359 March 1,697 8,664 8,083 15,236 Total 4,728 24,144 23,031 46,019 Revenue Hours January 329 February 316 March 361 Total
1,006

Total Cost/Hour 4.70 24.00 22.89 45.74 3) Create a contribution margin income statement for Salem Data Services. Assume that intra company usage is 205 hours. Assume commercial usage is at the March level.

Sales - intracompany 205 @ $400 Variable Expenses Detailed Sales - commercial 138 @ $800 Power 1,612 1,417 1,807 Personnel 8,232 7,238 9,226 Sales Promotion 7,853 6,905 8,800 Contribution Incomes Statement Corp. Service 15,690 13,797 17,584 Salem Data Services Total Variable 33,387 29,357 37,417 Total Per Unit Sales (343) 192,400 561 Variable Expenses 33,387 97 Contribution Margin 159,013 464 Fixed Expenses 189,620 Net Operating Income (30,607)

4) Assuming the intracompany demand for service will average 205 hours per month, what level of commercial revenue hours of computer use would be necessary to break even each month? Fixed expenses = 189,620 Per unit CM = 464 Units to break even = 409

5) Estimate the impact on income of each of the options Flores has suggested if Wu estimates as follows: a) Increasing the price to commercial customers to $1,000 per hour but reduce demand by 30% Sales - intracompany 205 @ $400 82,000 Per Unit Sales - commercial 96.6 @ $1,000 96,600 Sales 592 TOTAL 178,600 Variable Expenses 97 Total Sales Per Unit $592 Contribution Margin 495 Although this change will undoubtedly improve the individual contribution margin of the products (since it would increase the per unit price while limiting the variable costs), the lack of quantity will likely lower the total contribution margin by over 5% and thus cause a greater loss in the end.
b) Reducing the price to commercial customers to $600/hour would increase demand by 30%. Sales - intracompany 205 @ $400 82,000 Per Unit Sales - commercial 179.4 @ $600 107,640 Sales 493 TOTAL 189,640 Variable Expenses 97 Total Sales Per Unit $493 Contribution Margin 396 Like the above example, you'd be decreasing sales price by 25% while increasing demand by 30%. Although this would increase the demand, the increase is not enough to raise sales to the level pre-change. However, at the same time, the increase in hours will increase the variable costs. Therefore, I would expect net income to drop again, only less than in the reverse
scenario.

c) Increased promotion would increase revenue hours up to 30%. Sales - intracompany 205 @ $400 82,000 Per Unit Sales - commercial 179.4 @ $800 143,520 Sales 587 TOTAL 225,520 Variable Expenses 97 Total Sales Per Unit $587 Contribution Margin 490 This would impact net operating income positively. Although the additional sales will incur correspondingly more variable costs, the actual sales price is more than adequate to make up for the extra cost. This would increase the contribution margin and have enough quanity to go straight to the bottom line. 6) Based on your analysis above, is Salem Data Services really a problem to Salem Telephone Company? What should Flores do about Salem Data Services? No it is not. As with my past experience in small business, it is finding a solution to large fixed overhead costs and increasing customer awareness/demand of the product that is really the problem. The entity can make money - it just has to re-examine some of it's fixed costs and also build market demand.