Salem Telephone Company Case Analysis
Introduction
Peter Flores, president of Salem Telephone Company (STC) informed the Public Service Commission “that a profitable computer service Subsidiary would reduce pressure for the telephone rate increase.” And a result, Salem Data Services (SDS) was established. In 2003, SDS has “yet to experience a profitable month” and this induced the meeting between Peter Flores and Cynthia Wu, manager of SDS in April 2004. Flores and Wu held different views in regards to SDS; Flores felt SDS was draining STC resources and is questioning the ability of SDS to be a profitable business. Wu felt that SDS had the ability to show profits in the near future. To adequately prepare Flores, president of STC for his meeting with Wu, he assigns a task to a team of managerial accounting consultants to prepare a detailed analysis, which will aid in discussion with Wu.
Action Plan
1. To conduct a cost analysis to determine the main cost activities for SDS; this will include fixed cost and variable cost.
2. To conduct a revenue analysis to determine cost per revenue.
3. To construct a detailed Contribution Margin Income Statement for SDS.
4. To present a Break-Even analysis
5. To use What-If analysis to show the impact of increasing and decreasing commercial prices and promotion.
6. To make specific recommendation based on quantitative data to Flores, president of STC whether or not SDS will produce a profit.
Question 1 Based on Exhibit 2 the expenses incurred by Salem Data Services (SDS) fall into two categories- fixed expenses and variable expenses. The variable costs with respect to revenue hours are:
Power
Operations: hourly personnel
Fixed costs with respect to revenue hours are:
Space costs:
Rent
Custodial Services
Equipment costs
Computer leases
Maintenance
Depreciation: Computer equipment and office equipment and fixtures.
Wages and Salaries:
Operations: Salaried Staff
System development and maintenance
Administration
Sales
Sales promotion
Corporate services
Peter Flores, president of Salem Telephone Company (STC) informed the Public Service Commission “that a profitable computer service Subsidiary would reduce pressure for the telephone rate increase.” And a result, Salem Data Services (SDS) was established. In 2003, SDS has “yet to experience a profitable month” and this induced the meeting between Peter Flores and Cynthia Wu, manager of SDS in April 2004. Flores and Wu held different views in regards to SDS; Flores felt SDS was draining STC resources and is questioning the ability of SDS to be a profitable business. Wu felt that SDS had the ability to show profits in the near future. To adequately prepare Flores, president of STC for his meeting with Wu, he assigns a task to a team of managerial accounting consultants to prepare a detailed analysis, which will aid in discussion with Wu.
Action Plan
1. To conduct a cost analysis to determine the main cost activities for SDS; this will include fixed cost and variable cost.
2. To conduct a revenue analysis to determine cost per revenue.
3. To construct a detailed Contribution Margin Income Statement for SDS.
4. To present a Break-Even analysis
5. To use What-If analysis to show the impact of increasing and decreasing commercial prices and promotion.
6. To make specific recommendation based on quantitative data to Flores, president of STC whether or not SDS will produce a profit.
Question 1 Based on Exhibit 2 the expenses incurred by Salem Data Services (SDS) fall into two categories- fixed expenses and variable expenses. The variable costs with respect to revenue hours are:
Power
Operations: hourly personnel
Fixed costs with respect to revenue hours are:
Space costs:
Rent
Custodial Services
Equipment costs
Computer leases
Maintenance
Depreciation: Computer equipment and office equipment and fixtures.
Wages and Salaries:
Operations: Salaried Staff
System development and maintenance
Administration
Sales
Sales promotion
Corporate services