Salem Telephone Co Group 2 Case Study C
Group 2 (Bleaser; Humbles; Pennington; Robin; McLamb)
Case Study
Salem Telephone Company
The purpose of creating the subsidiary is twofold: (1) to keep telephone customers from having rate increases and (2) for Salem Telephone to plan, control and make decisions on performance of its operations in the area served. Planning would involve a financial budget and the level of profit needed. Control would be the measurement and comparison of actual to estimated budget analysis of management’s performance in controlling expenses and meeting estimated expectations. From this control performance, adjustment decisions to budget are made and to processes if necessary. The correct decisions can only be made if a cost-volume-profit analysis is performed to measure how cost behaviors change with activity.
For Salem Data Services, variable costs would be the costs that change with Revenue Hours, the key activity, such as power, operations hourly personnel, and corporate services. Sales promotion amounts do vary but is considered a discretionary fixed cost because it involves advertising and other promotional activities that can be easily changed in the short run. Costs per revenue hour for variable cost are presented in Illustration 1 below:
I-1
Expense Item
January
February
March
Power
$1,546/329=$4.70
$1,485/316=$4.70
$1,697/361=$4.70
Hourly Personnel
$7,896/329=$$24
$7,584/316=$24
$8,664/361=$24
Corporate Services
$15,424/329=$46.88
$15,359/316=$48.60
$15,236/361=$42.20
Fixed cost are System Development & Maintenance; Rent; Custodial Services; Computer Leases; Maintenance; Depreciation; Computer Equipment; Office Equipment and Fixtures; Salaried Staff; Administration and Sales Salaries; and Sales Promotion for they do not change with Revenue Hours activity. These fixed costs from the first quarter numbers presented in Illustration 2, represent an average of 90% of each month’s total costs. Salem Data Services is a risky business at this
Case Study
Salem Telephone Company
The purpose of creating the subsidiary is twofold: (1) to keep telephone customers from having rate increases and (2) for Salem Telephone to plan, control and make decisions on performance of its operations in the area served. Planning would involve a financial budget and the level of profit needed. Control would be the measurement and comparison of actual to estimated budget analysis of management’s performance in controlling expenses and meeting estimated expectations. From this control performance, adjustment decisions to budget are made and to processes if necessary. The correct decisions can only be made if a cost-volume-profit analysis is performed to measure how cost behaviors change with activity.
For Salem Data Services, variable costs would be the costs that change with Revenue Hours, the key activity, such as power, operations hourly personnel, and corporate services. Sales promotion amounts do vary but is considered a discretionary fixed cost because it involves advertising and other promotional activities that can be easily changed in the short run. Costs per revenue hour for variable cost are presented in Illustration 1 below:
I-1
Expense Item
January
February
March
Power
$1,546/329=$4.70
$1,485/316=$4.70
$1,697/361=$4.70
Hourly Personnel
$7,896/329=$$24
$7,584/316=$24
$8,664/361=$24
Corporate Services
$15,424/329=$46.88
$15,359/316=$48.60
$15,236/361=$42.20
Fixed cost are System Development & Maintenance; Rent; Custodial Services; Computer Leases; Maintenance; Depreciation; Computer Equipment; Office Equipment and Fixtures; Salaried Staff; Administration and Sales Salaries; and Sales Promotion for they do not change with Revenue Hours activity. These fixed costs from the first quarter numbers presented in Illustration 2, represent an average of 90% of each month’s total costs. Salem Data Services is a risky business at this