Salem Telephone Company Case Study

1. Variable Expenses with respect to revenue hours:
Power expense, hourly personnel salaries expense.
Fixed expenses with respect to revenue hours:
Rent, custodial services, computer leases, maintenance, depreciation of computer equipment and office equipment and fixtures, operations salaried staff, systems development and maintenance, administration, and sales, sales promotions, corporate services.
2. Units: dollars per hour January February March
Power expense 4.7 4.7 4.7 personnel salaries expense 24 24 24
Total Variable cost per revenue hour 28.7 28.7 28.7 3. Income statement for Salem Data Services
From the article, I know that intracompany work was billed at $400 per hour, and commercial sales were billed at $800 per hour.
So, intracompany contribution margin: $400-$28.7= $371.3/hr
Commercial contribution margin: $800-$28.7=$771.3/hr

Sales revenue $192,400
Variable cost $9844.1
Contribution margin $182,555.9
Fixed cost $212,939
Net loss ($30,383.1)

4. Revenue = Variable Costs + Fixed Costs
205(400) + X (800) =(X+205) (28.7) +212,939
X= 177.39 commercial hours sold to break-even

5. Original March:
P= Net Income= ($23,700)
For option 1:
P=205(400)+1000(96.6)-301.6(28.7) -212,939= -42,994.92
For option 2:
P=205(400) +600(179.4)-384.4(28.7) -212,939= -34,331.28
For option 3:
P=205(400) +800(179.4)-384.4(28.7) -212,939 = 1548.72
In conclusion, for option1 and 2, both will decrease in net income. For option3, net income will increase to a benefit amount. However, if the promotion expense is equal to or less than 1548.72, this option should be taken consideration.
6. Based on my analysis above, Salem Data Services is a problem to Salem Telephone Company. Firstly, Flores should consider the promotion can be the turning point or not. Then decide if he will abort this service. For my consideration, I will recommend Flores to abort this unprofitable