Salem Telephone Case Study
Salem telephone case
1. ”Revenue hours” represent the key activity that drives costs at Salem Data Service . Which expenses in Exhibit 2 are variable with respect to revenue hours? Which expenses are fixed with respect to revenue hours?
A : Variable costs : The power, hourly personal.
Fixed costs : The rent, custodial service, computer leases, maintenance, computer equipment, office equipment and fixtures, salaried staff, system development and maintenance, administration, sales promotion, Corporate service.
2. For each expense that is variable with respect to revenue hours, calculate the cost per revenue hour.
A :
January
February
March
Total revenue hours
329
316
361
Power
1546
1485
1697
Hourly personal
7896
7584
8664
Variable cost per revenue hour
28.699
28.699
28.700
3. Create a contribution margin income statement for Salem Data Service. Assume that intracompany usage is 205 hours. Assume commercial usage at the March level.
A : From the text, we know that intracompany work was billed at $400 per hour, and the commercial sales was billed $800 per hour.
The intracompany contribution margin = price - variable cost = $400 - $28.7 = $371.3/hr
The commercial contribution margin = $800 - $28.7= $771.3/hr
The intracompany usage is 205 hours, and the commercial usage in March is 138 hours.
So the sales revenue = $400 * 205 + $800 * 138 = $192,400
Variable costs = $28.7 * (205 + 138) = $9,844.1
The contribution margin = revenue - variable cost = $182,555.9
The fixed costs in March = total expenses - variable costs = $223,300 - 1,697 - 8,664 = $212,939
Net income ($30,383.1)
4. Assuming the intracompany demand for service will average 205 hours per month, what level of commercial revenue hours of computer use would be necessary to break even each month.
Since the intracompany demand is known to be 205 hours, the contribution from these sales is assured to cover a portion of the fixed costs. Thus, to determine the
1. ”Revenue hours” represent the key activity that drives costs at Salem Data Service . Which expenses in Exhibit 2 are variable with respect to revenue hours? Which expenses are fixed with respect to revenue hours?
A : Variable costs : The power, hourly personal.
Fixed costs : The rent, custodial service, computer leases, maintenance, computer equipment, office equipment and fixtures, salaried staff, system development and maintenance, administration, sales promotion, Corporate service.
2. For each expense that is variable with respect to revenue hours, calculate the cost per revenue hour.
A :
January
February
March
Total revenue hours
329
316
361
Power
1546
1485
1697
Hourly personal
7896
7584
8664
Variable cost per revenue hour
28.699
28.699
28.700
3. Create a contribution margin income statement for Salem Data Service. Assume that intracompany usage is 205 hours. Assume commercial usage at the March level.
A : From the text, we know that intracompany work was billed at $400 per hour, and the commercial sales was billed $800 per hour.
The intracompany contribution margin = price - variable cost = $400 - $28.7 = $371.3/hr
The commercial contribution margin = $800 - $28.7= $771.3/hr
The intracompany usage is 205 hours, and the commercial usage in March is 138 hours.
So the sales revenue = $400 * 205 + $800 * 138 = $192,400
Variable costs = $28.7 * (205 + 138) = $9,844.1
The contribution margin = revenue - variable cost = $182,555.9
The fixed costs in March = total expenses - variable costs = $223,300 - 1,697 - 8,664 = $212,939
Net income ($30,383.1)
4. Assuming the intracompany demand for service will average 205 hours per month, what level of commercial revenue hours of computer use would be necessary to break even each month.
Since the intracompany demand is known to be 205 hours, the contribution from these sales is assured to cover a portion of the fixed costs. Thus, to determine the