Salem Telephone Company Essay
SALEM TELEPHONE COMPANY
Professor William J. Bruns, Jr. & Julie Hertenstein
Introduction
Accounting is not always a black or white subject; there are many variables to consider when making a business decision. Looking past the numbers and being able to look at the larger picture will determine whether you will be an average manager or a great manager.
Background
Facing declining profits, Salem Telephone Company (STC) is evaluating the future of its subsidiary, Salem Data Services (SDS). SDS was meant to boost profits for STC, its parent company. STC could not simple raise its rates due to regulations set by the Public Services Commission. Unfortunately, the subsidiary, SDS, is not performing to expectations. STC’s president, Peter Flores, needs to decide if he should cut his losses and shut down SDS or keep SDS open. Cynthia Wu, the manager of SDS, believes SDS could be profitable in the near future.
Key Problems …show more content…
In an effort to not raise the rates for its customers, STC was hoping their subsidiary, SDS, would perform.
Unfortunately, that was not the case, the startup proved not to be the simple solution as planned. STC had one of its worst years; however, there was a light at the end of the tunnel as there were slight improvements with the startup, SDS. Peter Flores needs to decide whether to cut his losses or allow the STC more time to show profits. On the flip side, by cutting his losses and eliminating SDS, Flores would have to figure out another way to bring in money and not raise rates for his customers. Flores is risking the chance of walking away from an investment that the company had invested years into, which might to be worthwhile in the end and having to purchase these services elsewhere, which might not be good for business, cost wise, in the long
run.
Potential Solutions
1. Keep Salem Data Services open and increase the price of services.
(Solution 4a)
2. Keep Salem Data Services open and lower the price of services to increase volume. (Solution 4b)
3. Keep Salem Data Services open and increase promotions to drive up sales.
(Solution 4c)
4. Eliminate/outsource certain fixed costs or convert them into variable costs.
5. Close Salem Data Solutions.
Proposed Solution
It would be beneficial for STC to keep SDS in operation. Despite the fact that they are not meeting the profits that Flores had planned, Wu is correct; SDS might be on the verge of becoming a successful operation. As evidence, from February to March there was a ten percent increase in sales (Table 2). Adjusting pricing up or down, proved not to be an effective solution to get SDS in the black, however, by increasing promotions the company would see a profit. (Solution 4c)
Furthermore, from February to March there was a $1000 increase in promotions, this was the only change when sales increased. SDS provides valuable services for STC customers, a data service; these are potential savings to the company up to $82,000 a month. On a side note, shutting down SDS would cause STC to incur additional expenses, expenses that were not apparent when looking at the accounting reports.
Recommendations
SDS should focus on increasing promotions to get new business. By increasing promotions by 30%, they will be securely making a profit (Solution 1b). Increasing price did not make up for the loss in volume and lowering the price to get more volume, did not earn a profit (Solution 4a & 4b). By increasing promotions, SDS does not risk alienating any of their current customers. By increasing promotions, SDS will prove to be the profitable subsidiary that STC had intended and will save STC operation costs in the long run (Solution 4c).
Lastly, as an added suggestion, STC could look into removing some of its fixed costs or converting fixed costs into variable costs, in an effort to reduce the burden of the underperforming SDS, temporarily. STC could also experiment by looking into incentivizing its salaried personnel and possibly outsourcing some its administrative costs (HR, Benefits, Payroll, Accounting, etc.).
Tables
Table 1:
Salem Data Services Summary of Computer Utilization, First Quarter 2004 January February March Number of weekdays (M–F) 22 20 23
X 24 hours per day 528 480 552 Number of Saturdays 5 4 4
X 8 hours per day 40 32 32 Total hours available for revenue 568 512 584 Revenue hours
Intracompany 206 181 223
Commercial 123 135 138
Total revenue hours 329 316 361 Hours available to sell 239 196 223
Source: Casewriter.
Table 2:
Salem Data Services Summary Results of Operations, First Quarter 2004 January February March Revenues
Intracompany sales $82,400 $72,400 $89,200
Commercial sales 98,400 108,000 110,400
Total revenue $180,800 $180,400 $199,600 Expenses
Space costs:
Rent $8,000 $8,000 $8,000
Custodial services 1,240 1,240 1,240 9,240 9,240 9,240 Equipment costs
Computer leases 95,000 95,000 95,000
Maintenance 5,400 5,400 5,400
Depreciation:
Computer equipment 25,500 25,500 25,500
Office equipment and fixtures 680 680 680
Power 1,546 1,485 1,697 128,126 128,065 128,277 Wages and salaries
Operations: salaried staff 21,600 21,600 21,600
Operations: hourly personnel 7,896 7,584 8,664
Systems development and maintenance 12,000 12,000 12,000
Administration 9,000 9,000 9,000
Sales 11,200 11,200 11,200 61,696 61,384 62,464 Sales promotion 7,909 7,039 8,083
Corporate services 15,424 15,359 15,236
Total expenses $222,395 $221,087 $223,300 Net income (loss) ($41,595) ($40,687) ($23,700)
Source: Casewriter.
Solutions Sets
Solution 1a:
Contribution Margin Income Statement
Total Revenue: $199,600
Less Variable Expenses: Power: $1,697 Hourly Personnel: 8,664 $10,361 Contribution Margin: 189,239
Less Fixed Expenses: Space Costs: 9,240 Equipment: 126,580 Salaries: 53,800 Sales Promotion: 8,803 Corporate Services: 15,236 213,659
Net Income: (24,420)
Solution 1b:
Contribution Margin Income Statement with a 30% increase in promotion
Total Revenue: $259,300
Less Variable Expenses: Power: $1,697 Hourly Personnel: 8,664 $10,361 Contribution Margin: 248,939
Less Fixed Expenses: Space Costs: 9,240 Equipment: 126,580 Salaries: 53,800 Sales Promotion: 11,444 Corporate Services: 15,236 216,300
Net Income: 32,639
Solution 2:
Variable cost per hour
Variable costs: January February March Power 1546 1485 1697 Operations: hourly personnel 7896 7584 8664
Total 9442 9069 10361
Total revenue hours 329 316 361
Variable costs per hour 28.70 28.70 28.70
Solution 3:
Commercial revenue hours (break-even)
Intercompany sales $ 82,000.00 Fixed costs -212939 Variable costs -10361
Total $(141,300.00) Commercial (sales/hr) *given $ 800.00
Break even hours (total/sale per hour) 177
Solution 4a:
Increased commercial costs: $1000.00 per hour; Demand decrease: 30%
Hours Cost Per Hour Total
Intercompany sales 205 400 82000
Commercial sales 97 1000 97000
Total Rev 179000
F/C -212939
VC/hr -8668 New Net Income -42607
Original Net Income 24420
Diff -18187
Solution 4b:
Reduce commercial costs: $600.00 per hour; Demand increase: 30%
Hours Cost Per Hour Total
Intercompany sales 205 400 82000
Commercial sales 179 600 107400
Total Rev 189400
F/C -212939
VC/hr -11021 New Net Income -34560
Original Net Income 24420
Diff -10140
Solution 4c:
Reduce commercial costs: $800 per hour; Increase promotion: 30% max
Hours Cost Per Hour Total
Intercompany sales 205 400 82000
Commercial sales 179 800 143200
Total Rev 225200
F/C -212939
VC/hr -11021 New Net Income 1240
Original Net Income 24420
Diff 25660
References
Bruns, W. (2005). Case Study. Salem Telephone Company, Pages 1-5.
Jiambalvo, J. (2013). Managerial Accounting. Hoboken, NJ: John Wiley & Sons, Inc.
Professor William J. Bruns, Jr. & Julie Hertenstein
Introduction
Accounting is not always a black or white subject; there are many variables to consider when making a business decision. Looking past the numbers and being able to look at the larger picture will determine whether you will be an average manager or a great manager.
Background
Facing declining profits, Salem Telephone Company (STC) is evaluating the future of its subsidiary, Salem Data Services (SDS). SDS was meant to boost profits for STC, its parent company. STC could not simple raise its rates due to regulations set by the Public Services Commission. Unfortunately, the subsidiary, SDS, is not performing to expectations. STC’s president, Peter Flores, needs to decide if he should cut his losses and shut down SDS or keep SDS open. Cynthia Wu, the manager of SDS, believes SDS could be profitable in the near future.
Key Problems …show more content…
In an effort to not raise the rates for its customers, STC was hoping their subsidiary, SDS, would perform.
Unfortunately, that was not the case, the startup proved not to be the simple solution as planned. STC had one of its worst years; however, there was a light at the end of the tunnel as there were slight improvements with the startup, SDS. Peter Flores needs to decide whether to cut his losses or allow the STC more time to show profits. On the flip side, by cutting his losses and eliminating SDS, Flores would have to figure out another way to bring in money and not raise rates for his customers. Flores is risking the chance of walking away from an investment that the company had invested years into, which might to be worthwhile in the end and having to purchase these services elsewhere, which might not be good for business, cost wise, in the long
run.
Potential Solutions
1. Keep Salem Data Services open and increase the price of services.
(Solution 4a)
2. Keep Salem Data Services open and lower the price of services to increase volume. (Solution 4b)
3. Keep Salem Data Services open and increase promotions to drive up sales.
(Solution 4c)
4. Eliminate/outsource certain fixed costs or convert them into variable costs.
5. Close Salem Data Solutions.
Proposed Solution
It would be beneficial for STC to keep SDS in operation. Despite the fact that they are not meeting the profits that Flores had planned, Wu is correct; SDS might be on the verge of becoming a successful operation. As evidence, from February to March there was a ten percent increase in sales (Table 2). Adjusting pricing up or down, proved not to be an effective solution to get SDS in the black, however, by increasing promotions the company would see a profit. (Solution 4c)
Furthermore, from February to March there was a $1000 increase in promotions, this was the only change when sales increased. SDS provides valuable services for STC customers, a data service; these are potential savings to the company up to $82,000 a month. On a side note, shutting down SDS would cause STC to incur additional expenses, expenses that were not apparent when looking at the accounting reports.
Recommendations
SDS should focus on increasing promotions to get new business. By increasing promotions by 30%, they will be securely making a profit (Solution 1b). Increasing price did not make up for the loss in volume and lowering the price to get more volume, did not earn a profit (Solution 4a & 4b). By increasing promotions, SDS does not risk alienating any of their current customers. By increasing promotions, SDS will prove to be the profitable subsidiary that STC had intended and will save STC operation costs in the long run (Solution 4c).
Lastly, as an added suggestion, STC could look into removing some of its fixed costs or converting fixed costs into variable costs, in an effort to reduce the burden of the underperforming SDS, temporarily. STC could also experiment by looking into incentivizing its salaried personnel and possibly outsourcing some its administrative costs (HR, Benefits, Payroll, Accounting, etc.).
Tables
Table 1:
Salem Data Services Summary of Computer Utilization, First Quarter 2004 January February March Number of weekdays (M–F) 22 20 23
X 24 hours per day 528 480 552 Number of Saturdays 5 4 4
X 8 hours per day 40 32 32 Total hours available for revenue 568 512 584 Revenue hours
Intracompany 206 181 223
Commercial 123 135 138
Total revenue hours 329 316 361 Hours available to sell 239 196 223
Source: Casewriter.
Table 2:
Salem Data Services Summary Results of Operations, First Quarter 2004 January February March Revenues
Intracompany sales $82,400 $72,400 $89,200
Commercial sales 98,400 108,000 110,400
Total revenue $180,800 $180,400 $199,600 Expenses
Space costs:
Rent $8,000 $8,000 $8,000
Custodial services 1,240 1,240 1,240 9,240 9,240 9,240 Equipment costs
Computer leases 95,000 95,000 95,000
Maintenance 5,400 5,400 5,400
Depreciation:
Computer equipment 25,500 25,500 25,500
Office equipment and fixtures 680 680 680
Power 1,546 1,485 1,697 128,126 128,065 128,277 Wages and salaries
Operations: salaried staff 21,600 21,600 21,600
Operations: hourly personnel 7,896 7,584 8,664
Systems development and maintenance 12,000 12,000 12,000
Administration 9,000 9,000 9,000
Sales 11,200 11,200 11,200 61,696 61,384 62,464 Sales promotion 7,909 7,039 8,083
Corporate services 15,424 15,359 15,236
Total expenses $222,395 $221,087 $223,300 Net income (loss) ($41,595) ($40,687) ($23,700)
Source: Casewriter.
Solutions Sets
Solution 1a:
Contribution Margin Income Statement
Total Revenue: $199,600
Less Variable Expenses: Power: $1,697 Hourly Personnel: 8,664 $10,361 Contribution Margin: 189,239
Less Fixed Expenses: Space Costs: 9,240 Equipment: 126,580 Salaries: 53,800 Sales Promotion: 8,803 Corporate Services: 15,236 213,659
Net Income: (24,420)
Solution 1b:
Contribution Margin Income Statement with a 30% increase in promotion
Total Revenue: $259,300
Less Variable Expenses: Power: $1,697 Hourly Personnel: 8,664 $10,361 Contribution Margin: 248,939
Less Fixed Expenses: Space Costs: 9,240 Equipment: 126,580 Salaries: 53,800 Sales Promotion: 11,444 Corporate Services: 15,236 216,300
Net Income: 32,639
Solution 2:
Variable cost per hour
Variable costs: January February March Power 1546 1485 1697 Operations: hourly personnel 7896 7584 8664
Total 9442 9069 10361
Total revenue hours 329 316 361
Variable costs per hour 28.70 28.70 28.70
Solution 3:
Commercial revenue hours (break-even)
Intercompany sales $ 82,000.00 Fixed costs -212939 Variable costs -10361
Total $(141,300.00) Commercial (sales/hr) *given $ 800.00
Break even hours (total/sale per hour) 177
Solution 4a:
Increased commercial costs: $1000.00 per hour; Demand decrease: 30%
Hours Cost Per Hour Total
Intercompany sales 205 400 82000
Commercial sales 97 1000 97000
Total Rev 179000
F/C -212939
VC/hr -8668 New Net Income -42607
Original Net Income 24420
Diff -18187
Solution 4b:
Reduce commercial costs: $600.00 per hour; Demand increase: 30%
Hours Cost Per Hour Total
Intercompany sales 205 400 82000
Commercial sales 179 600 107400
Total Rev 189400
F/C -212939
VC/hr -11021 New Net Income -34560
Original Net Income 24420
Diff -10140
Solution 4c:
Reduce commercial costs: $800 per hour; Increase promotion: 30% max
Hours Cost Per Hour Total
Intercompany sales 205 400 82000
Commercial sales 179 800 143200
Total Rev 225200
F/C -212939
VC/hr -11021 New Net Income 1240
Original Net Income 24420
Diff 25660
References
Bruns, W. (2005). Case Study. Salem Telephone Company, Pages 1-5.
Jiambalvo, J. (2013). Managerial Accounting. Hoboken, NJ: John Wiley & Sons, Inc.