This case study analyzes the financial performance of Salem Telephone Company. It identifies the company's variable and fixed expenses. Variable expenses include power costs and hourly wages, while fixed expenses include rent, maintenance, and administration. The document then provides revenue and cost data for January-March and calculates break-even commercial hours. It evaluates three options to increase commercial hours through promotions, finding the third option of increasing hours 30% at $800/hour could earn a small profit if promotion costs are under $1548.72. The document concludes Salem Data Service is not necessarily problematic and recommends decreasing fixed costs and properly increasing promotions to improve performance.
This case study analyzes the financial performance of Salem Telephone Company. It identifies the company's variable and fixed expenses. Variable expenses include power costs and hourly wages, while fixed expenses include rent, maintenance, and administration. The document then provides revenue and cost data for January-March and calculates break-even commercial hours. It evaluates three options to increase commercial hours through promotions, finding the third option of increasing hours 30% at $800/hour could earn a small profit if promotion costs are under $1548.72. The document concludes Salem Data Service is not necessarily problematic and recommends decreasing fixed costs and properly increasing promotions to improve performance.
This case study analyzes the financial performance of Salem Telephone Company. It identifies the company's variable and fixed expenses. Variable expenses include power costs and hourly wages, while fixed expenses include rent, maintenance, and administration. The document then provides revenue and cost data for January-March and calculates break-even commercial hours. It evaluates three options to increase commercial hours through promotions, finding the third option of increasing hours 30% at $800/hour could earn a small profit if promotion costs are under $1548.72. The document concludes Salem Data Service is not necessarily problematic and recommends decreasing fixed costs and properly increasing promotions to improve performance.
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
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
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.