Salem Telephone Company Case Study

1. Operations wages for hourly personnel and office equipment and fixtures are the only variable cost with respect to revenue hours. All other costs are fixed with respect to revenue hours. With higher fixed cost, Salem Data Services has a higher leverage and is therefore riskier.
2. ($7,896 + $1,546) / 329 hours = $28.70 / hour. For every hour spent working, the company spends 28.70 dollars.
3. Intracompany Commercial Total
Number of Hours (a): 205 138 343
Revenue (a x b): $82,000 $110,400 $192,400
Variable Costs (a x c): ($5,883.50) ($3,960.60) ($9,844.10)
Contribution Margin: $76,116.50 $106,439.40 $182,555.90
Fixed Costs: ($212,939) Net Income: ($30,383.10)
4. Commercial fixed cost = total fixed cost – intracompany fixed cost
CFX = $212,939 – (76,116.50) = $136,822.50
(SP/unit * # of units sold) = (VC/unit * # of units sold) + FC
$800x = $28.70x + $136,822.50
$771.3x = $136,822.50 x= 177.39 hours
5. Increase price to $1000 Intracompany Commercial Total
Number of Hours (a): 205 96.6 301.6
Revenue (a x b): $82,000 $96,600 $178,600
Variable Costs (a x c): ($5,883.50) ($3,960.60) ($9,844.10)
Contribution Margin: $76,116.50 $92,639.40 $168,755.90
Fixed Costs: ($212,939) Net Income: ($44,183.10) Decrease price to $600 Intracompany Commercial Total
Number of Hours (a): 205 179.4 384.4
Revenue (a x b): $82,000 $107,640 $189,640
Variable Costs (a x c): ($5,883.50) ($3,960.60) ($9,844.10)
Contribution Margin: $76,116.50 $103,679.40 $179,795.90
Fixed Costs: ($212,939) Net Income: ($33,143.10)
Increase promotion Intracompany Commercial Total
Number of Hours (a): 205 179.4 834.4
Revenue (a x b): $82,000 $143,520 $225,520
Variable Costs (a x c): ($5,883.50) ($3,960.60) ($9,844.10)
Contribution Margin: $76,116.50 $139,559.40 $215,675.90
Fixed Costs: ($212,939) Net Income: $2,736.90
Salem Data