Salem Telephone Company Case Study

Case Study #1. Salem Telephone Company

1. Variable expenses:
Power (the more hours sold, the more energy consumed)
The hourly personnel (operations) works only when the computers are in operation

Fixed expenses:
The rent has to be paid despite any level of production ($8,000 monthly)
The custodial services depend on Salem Telephone's estimated space, they are independent from the revenue of the Company
The computer leases were acquired to run the business (before it was actually started up)
The maintenance is necessary even when you do not produce/sell anything
The deprecation depends on the number of years not on the number of hours sold
Operations: salaried stuff consists of the six people necessary to run the center (the number of people remains the same)
Systems development and maintenance the system needs to be developed and maintained constantly to keep the work in process
Administration: the salaries are paid on a fixed regular basis
Sales promotion: there is a certain amount of money that has been allocated on advertising
Corporate services are independent from revenue (are obtained when needed)
Sales (should equal an estimated amount)

2.

January
March
February
Power
1,576
4,485
1,697
Hourly personnel
7.896
7,584
8,664
Total Rev. hours
329
316
361
VC/Revenue hour (Power)
4.7
4.7
4.7
VC/ Revenue hour (personnel)
24
24
24
Total Variable Cost/ hour
28.7
28.7
28.7

Variable cost per revenue hour remains the same although the activity (the number of revenue hours) varies.

3. Variable cost per unit
Power $ 4.70
Operations: hourly personnel $ 24
Revenues $ 192,400
Intracompany sales ($ 400 x 205) $ 82,000
Commercial sales ($ 800 x 138) $ 110,400
Variable Cost ($ 9,844.1)
Power ($ 4,7 x 343) ($ 1,612.10)
Operations: hourly