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Case Study

Salem Telephone Company








Name:

Due Date:




1

1. With respect to revenue hours, power costs and hourly personnel wages are
variable expenses, because the cost per hour is constant for these two expenses.
Rent, custodial services, computer leases, maintenance, depreciation of
computer equipment, office equipment and fixtures, operations salaried staff,
systems development and maintenance, administration, sales, sales promotions,
and corporate services are fixed expenses.
(Sales promotion had no connection with current level of works but depend on
the estimation of future services and supports, while the amount of corporate
services was based on total wages and current accounts. So they are not variable
costs with respect to revenue hours.)

2.
January February March
Total revenue hours 329 316 361
Power expense $1546 $1485 $1697
Operations: hourly personnel $7896 $7584 $8664
Power expense per hour $4.7/h $4.7/h $4.7/h
Hourly personnel wage per hour $24/h $24/h $24/h
Total variable cost per hour $28.7/h $28.7/h $28.7/h

3. Intracompany sales=205 h*$400/h=$82,000
Commercial sales=138h*$800/h=$110,400
Variable costs=$28.7/h*(205+138) =$9844.1
Fixed costs=Total expenses- (Power expenses+ hourly
personnel salaries) =$223,300-(1697+8664) =$212,939


4. Assume the commercial revenue hour is x , then we can conclude
205*400+800*x=28.7*(x+205) +212,939, so x=177.39 hours
So the break-even commercial hour is 177.39 hours.

Income Statement
Revenue
Intracompany sales $82,000
Commercial sales 110,400
Total revenue $192,400
Variable costs (9,844.1)
Contribution margin $182,555.9
Fixed costs (212,939)
Net income(loss) ($30,383.1)
2

5. A) Commercial hours=138h*(1-30%)= 96.6h
Revenue:205h*$400/h+96.6h*$1000/h=$178,600
Variable costs=$28.7*(96.6+205h) =$8,655.92 Fixed costs=$212,939
Net income=$178,600-8655.92-212,939= -$42994.92

B) Commercial hours=138h*(1+30%) = 179.4h
Revenue:205h*$400/h+179.4h*$600/h=$189,640
Variable costs=$28.7*(179.4+205h) =$11032.28 Fixed costs=$212,939
Net income=$189,640-11032.28-212,939= -$34,331.28

C) Commercial hours=138h*(1+30%) = 179.4h
Revenue:205h*$400/h+179.4h*$800/h=$225,520
Variable costs=$28.7*(179.4+205h) =$11032.28
Increased promotion=$225,520-11032.28-212,939=$1548.72

As a conclusion, compared to original net loss of -$23,700 in March, the first two
options are both worse off, will decrease the net income. The third option will earn
no profit due to an extra promotion, however if promotion cost is larger than
$1548.72, the company will have a net loss, the option will not be taken into
consideration.

6. I dont think Salem Data Service is a problem to the company. On one hand, we
can see that the income is increasing from January to March, and the third option
provides a possible solution to earn a net profit, by adding extra promotion costs
or decreasing the amount of fixed costs. On the other hand, if the company stops
the services, it will pay for additional computer services and the cost to shut
down the business would be high.
Flores should think about the possible ways to decrease the fixed costs of the
service since its the major problem of net loss and increase promotion properly.