Salem Telephone Company
Salem Telephone Company-Case Study
Peter Flores, President of Salem Telephone Company, believes that a computer subsidiary company (Salem Data Services) appears to be unprofitable. And because of this, he must decide and determine whether it is actually unprofitable and consider whether changes in prices or promotion might improve profitability by using the Break-Even point analysis.
But before we come out to any solutions, we must discuss Salem Data Services accounting report.
First, we have to divide the various costs incurred in Salem Data Services in two types: Variable costs and Fixed Costs.
From Exhibit 2 we can see that only "Power" and "Operations: hourly personnel" are variable costs that have relation to the total revenue hours (Question 1). Other expenses listed in Exhibit 2 are all Fixed Costs.
Now we can calculate the unit of Variable Costs per Revenue Hours as follows-Question 2: Expenses January February March
Power $1,546 $1,485 $1,697
Operational hours-hourly personnel 7,896 7,584 8,664
Total Variable Costs $9,442 $9,069 $10,361
Total Revenue hours 329 316 361
Variable Costs per Revenue hour $28.70 $28.70 $28.70 Furthermore, by distinguish the variable costs and fixed costs, we now can construct the contribution margin
Income Statement for SDS at its March level, assuming 205 hours for Intercompany usage-Question 3
Income Statement
Revenues:
-Intracompany $82,000 -Commercial 110,400
Total Revenues 192,400
Variable Expenses: -Power 1,697 -Hourly Personnel 8,147
Subtotal Variable Expenses 9,844
Contribution Margin 182,556
Fixed Expenses: -Rent 8,000 -Custodial Services 1,240 -Computer Leases 95,000 -Maintenance 5,400 -Depreciation 26,180 -Salaried Staff 21,600 -System Development 12,000 -Administration 9,000 -Sales 11,200 -Sales Promotion
Peter Flores, President of Salem Telephone Company, believes that a computer subsidiary company (Salem Data Services) appears to be unprofitable. And because of this, he must decide and determine whether it is actually unprofitable and consider whether changes in prices or promotion might improve profitability by using the Break-Even point analysis.
But before we come out to any solutions, we must discuss Salem Data Services accounting report.
First, we have to divide the various costs incurred in Salem Data Services in two types: Variable costs and Fixed Costs.
From Exhibit 2 we can see that only "Power" and "Operations: hourly personnel" are variable costs that have relation to the total revenue hours (Question 1). Other expenses listed in Exhibit 2 are all Fixed Costs.
Now we can calculate the unit of Variable Costs per Revenue Hours as follows-Question 2: Expenses January February March
Power $1,546 $1,485 $1,697
Operational hours-hourly personnel 7,896 7,584 8,664
Total Variable Costs $9,442 $9,069 $10,361
Total Revenue hours 329 316 361
Variable Costs per Revenue hour $28.70 $28.70 $28.70 Furthermore, by distinguish the variable costs and fixed costs, we now can construct the contribution margin
Income Statement for SDS at its March level, assuming 205 hours for Intercompany usage-Question 3
Income Statement
Revenues:
-Intracompany $82,000 -Commercial 110,400
Total Revenues 192,400
Variable Expenses: -Power 1,697 -Hourly Personnel 8,147
Subtotal Variable Expenses 9,844
Contribution Margin 182,556
Fixed Expenses: -Rent 8,000 -Custodial Services 1,240 -Computer Leases 95,000 -Maintenance 5,400 -Depreciation 26,180 -Salaried Staff 21,600 -System Development 12,000 -Administration 9,000 -Sales 11,200 -Sales Promotion