CASE STUDY 3B

Renowned Telephone Company

REALYN AUSTRIA

GSBA 002: MANAGEMENT

ACCOUNTING
Leo D. Manansala, Ph.D.
I. EXECUTIVE SUMMARY
Renowned Telephone Company (RTC) is owned by Daniel Ross. RTC is a public utility
company regulated by Public Service Commission (PSC). Being a public utility company, Ross
cannot easily adjust his rates since his company is regulated by PSC. He then proposed for a
subsidiary company of RTC named Renowned Data Services (RDS) which will not be under the
regulation of PSC. The subsidiary will provide data processing services for telephone companies
and sell computer services. Through the existence of RDS, Ross was able to persuade and convince
PSC that this will reduce the pressure for telephone rate increases. PSC approved for the subsidiary
under the condition that the average monthly charge for the service does not exceed $82K.
However, during the course of the start-up way back 1995, RDS encountered a lot of issues
like delayed shipment of equipment, high labor cost, and low sales return. The earlier part of the
operation has even affected RTC’s cash flow as it went down and became the lowest return in 7
years. In 1996, it turned out that the demand for data services did not grow. Despite this situation,
Bradley is still hopeful that the company will be profitable in the next month. However, Ross
already decide to review the RDS performance and operation. He may be discouraged by the result
but he is still reluctant that RDS be closed down and or sell the company.

A. Key Facts
 Renowned Telephone Company is owned by Daniel Ross which is a public utility
business and is regulated by PSC. Due to the regulation of PSC, RTC cannot easily
adjust its service rates which should go through the approval of the former. Hence,
the founding of its subsidiary, Renowned Data Services.
 Upon the start of the Renowned Data Services on 1994, it did not become profitable
even until 1996. While the financial data shows that the company is not making any
profit, he is still reluctant to close or sell the business.
 In 1997, Ross scheduled a business review with Susan Bradley who is the manager of
RDS, due to the current business situation.

B. Salient Issues
 Net Profit Loss for 1 quarter data
 Unrealized available hours

II. QUESTIONS

A. BIG QUESTIONS
 How many revenue hours does RDS make to breakeven?
 Does RDS need to maintain that high Fixed Costs during its start-up?
 How to convert available hours to revenue hours to help gain more sales?
B. SUB-LIST “DRILL DOWN QUESTIONS
 How can RDS measure the performance of its Sales Team force to convert more revenue
sales to gain profit?
 Does RDS need a big space for operation during the start-up of the company?
III. DECISIONS TO BE MADE

A. FRAME THE MAJOR DECISIONS

 Decision on whether to shutdown or to sell the RDS.
 Decision to perform cost-cutting measures to reduce High Fixed Cost based on the 1st
quarter of its operation.

IV. QUANTITATIVE ANALYSIS

Table 1: Contribution Margin (CM)

Particulars Intracompany Work Commercial Sales
Selling Price 400 800
Variable Cost per Unit 74.42 74.42
Contribution Margin 325.58 725.58

Table 2: Profit Computation

Sales January February March
Intracompany $ 82,400.00 $ 72,400.00 $ 89,200.00
Price per Unit $ 400.00 $ 400.00 $ 400.00
Revenue Hours 206 181 223
Commercial Sales $ 98,400.00 $ 108,000.00 $110,400.00
Price per Unit $ 800.00 $ 800.00 $ 800.00
Revenue Hours 123 135 138
Total Sales $ 180,800.00 $ 180,400.00 $199,600.00
Variable Cost
Intracompany Work $ 15,329.98 $ 13,469.55 $ 16,595.08
Commercial Sales $ 9,153.34 $ 10,046.35 $ 10,269.60
Total Variable Cost $ 24,483.32 $ 23,515.90 $ 26,864.68
Fixed Cost 191,353.00 190,418.00 191,339.00
Profit $ (35,036.32) $ (33,533.90) $ (18,603.68)

Table 3: Breakeven Computation

Breakeven Analysis
Fixed Cost $ 191,036.67
Cost Covered by RTC $ 82,000.00
Contribution Margin
Intracompany 325.58
Commercial Sales 725.58
Revenue Hours to Breakeven
Intracompany (hrs) 334.90
Commercial Sales (hrs) 113.01
Breakeven Unit (hrs) 448

CM Rato 87%
Fixed Expenses $ 191,036.67
Breakeven in Sales (Dollars) $ 220,468.00
***All figures are based on information stated in case and Exhibits 1 and 2

As shown on Table 3, RDS will achieve its breakeven point when Revenue Hours is
increased on Intracompany Work from 203 hours to 335 hours while maintaining Commercial Sales
in its current state. The additional hours needed to increase the revenue hours for Intracompany or
by adding new customers can be obtained from the remaining available hours which remains
unutilized to convert into sales.
In reference to the Exhibit 1 from the original text of the case, it shows an average total
hours of 545 which only 335 hours are utilized, leaving around 210 hours with unrealized sales.
Going back to Table 3, the difference needed to achieve breakeven for Intracompany or
additional new customer is 132 hours at the rate of $400 which can be covered by the unutilized
hours from the unreasled sales of 210 hours.
V. QUALITATIVE ANALYSIS
 Employees demand for high salary rate than expected.
 Delayed deliveries of Equipment which could have possibly affected the start up operations of
the company wherein its already incurring cost but is not operating.
 Expected demand did not flourish as expected. The need for data services of telephone
company did not grow significantly.
 The managing director is blinded with the company’s performance even until its 3rd month of
operations. They could have performed monthly analysis to mitigate the losses in 3
consecutive months.

VI. CONCLUSIONS/RECOMMENDATIONS

Daniel Ross shall not sell nor close the company at this early. Bradley and her sales team shall
work on to achieve the additional revenue hours needed to achieve the breakeven point. There are
still plenty of available hours which they can offer to customers without incurring additional cost.
It is not required nor essential to increase the unit cost either. The company shall only need to boost
the sales to increase by 210 revenue hours at $400 rate.