Salem Telephone

Company
Fixed and Variable Expenses
Fixed Variable
1. Space Costs
Rent
Custodial Services
2. Equipment Costs
Computer Leases
Maintenance
Depreciation
Computer Equipment
Office Equipment and
Fixtures
3. Wages and Salaries
Operations: Salaried Staff
Systems Development and
Maintenance
Administration
Sales
4. Sales Promotions
5. Corporate Services
1. Equipment Costs
Power
2. Wages and Salaries
Operations: Hourly Personnel
Cost per Revenue hour for Variable
Expenses
January February March
Total Revenue
Hours
329 316 361
Total Power 1546 1485 1697
Operations:
Hourly Personnel
7896 7584 8664
Cost of Power/
Hour
4.699 4.699 4.701
Hourly Personnel
cost/ Hour
24 24 24
Contribution Margin Income Statement
Contribution Margin is the difference between total revenue
and variable expense

Net operating income is obtained by subtracting total fixed
expenses from the contribution margin

Total Revenue is $192400
Contribution Margin is $ 182555.90
Net Operating Income is $30383.10
Breakeven
Break-even Quantity = Net fixed Expenses / (Price Variable
Cost per unit)

Net fixed expenses = Total fixed expenses Contribution
Margin

Variable Cost per unit is the sum of variable cost due to power
and hourly personnel

Break-even hours = 177.39 ~ 178 hours



Scenario 1
Increasing the price to $1000 hours would reduce
demand by 30%

Commercial sales hours reduces to 97

Resulting in
o Total revenue of $179000
o Contribution Margin $170332
o Net Operating Income $(42606.40)

Scenario 2
Reducing the price to $600 hours would increase
demand by 30%

Commercial sales hours increases 180

Resulting in
Total revenue of $190000
Contribution Margin $178950.50
Net Operating Income $(33988.50)

Scenario 3
Increased promotion resulting in additional revenue
hours of 30%

Commercial sales hours increases 180

Resulting in
Total revenue of $226000
Contribution Margin $214950.50
Net Operating Income $2011.50

Recommendations
Scenario 3 in which promotion is increased is the
only option fetching profit

But there is no mention of the increased cost of
promotion
o Maximum possible increase in promotion can be
$2011.50(Break-even)

The above calculations are not showing the cost
the telephone company is saving because of
subsidized rate by SDS



Thank you