Salem Telephone Company
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?
A) Variable with respect to revenue hours Hourly personnel Salaries expense Power Expense
B) Fixed expenses with respect to revenue hours: Rent Custodial services Computer leases Maintenance Depreciation of computer equipment, office equipment and fixtures Operations salaried staff Systems development and maintenance Administration and sales Sales promotion Corporate services
2. For each expense that is variable with respect to revenue hours, calculate the cost per revenue hour. Power Hourly Personnel Salaries Overall Cost
January
1546/329=4.7 7896/329=24 =24+4.7=28.7
February
1485/316=4.7 7584/316=24 =4.7+24=28.7
March
1697/361=4.7 8664/361=24 =24+4.7=28.7
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.
Revenue
Variable costs
Contribution Margin
Fixed Costs
Operating Income (loss)
From the case we know that intracompany work was billed at $400 per hour, and commercial sales were billed at $800 per hour.
Commercial
138*$800=$110,400
138*$28.70=$3960.60
($800-28.7)*138= $106,439.40
Intracompany
205*$400=$82,000
205*$28.7=5883.5
(400-28.7)*205= $76116.50
Overall
$192,400
$9844.10
$182,555.90
$212,939
($30,383.10)
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?
Break even formula follows: Revenue = Variable Costs + Fixed Costs
205*400 + X *800 =(X+205) *28.7 +212,939
X= 177.39 Hrs. needed to break even
5. Each option will affect
A) Variable with respect to revenue hours Hourly personnel Salaries expense Power Expense
B) Fixed expenses with respect to revenue hours: Rent Custodial services Computer leases Maintenance Depreciation of computer equipment, office equipment and fixtures Operations salaried staff Systems development and maintenance Administration and sales Sales promotion Corporate services
2. For each expense that is variable with respect to revenue hours, calculate the cost per revenue hour. Power Hourly Personnel Salaries Overall Cost
January
1546/329=4.7 7896/329=24 =24+4.7=28.7
February
1485/316=4.7 7584/316=24 =4.7+24=28.7
March
1697/361=4.7 8664/361=24 =24+4.7=28.7
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.
Revenue
Variable costs
Contribution Margin
Fixed Costs
Operating Income (loss)
From the case we know that intracompany work was billed at $400 per hour, and commercial sales were billed at $800 per hour.
Commercial
138*$800=$110,400
138*$28.70=$3960.60
($800-28.7)*138= $106,439.40
Intracompany
205*$400=$82,000
205*$28.7=5883.5
(400-28.7)*205= $76116.50
Overall
$192,400
$9844.10
$182,555.90
$212,939
($30,383.10)
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?
Break even formula follows: Revenue = Variable Costs + Fixed Costs
205*400 + X *800 =(X+205) *28.7 +212,939
X= 177.39 Hrs. needed to break even
5. Each option will affect