Salem

Salem Telephone
Telephone
Company
Company

Presented by-
 abhay
 mukesh
 jatha
 milllllllan
 Chiru
 paro
 Overview
 Salem Telephone Company(STC) had
established Salem Data Services(SDS) to
perform data processing and selling computer
services in 2000
 It aimed at reducing pressure for telephone
rate increases
 It was not running on profit till the end of 2003
 Peter Flores, president of STC felt immediate
action was needed to reduce drain of STC
resources
 Exhibit 1
Particulars January February March
Number of 22 20 23
weekdays(M-F)
X24 hours per day 528 480 552
Number of 5 4 4
Saturdays
X8hours per day 40 32 32
Total hours 568 512 584
available for
revenue
Revenue hours-
Intra-company 206 181 223
Commercial 123 135 138
Total revenue 329 316 361
hours
Hours available to 239 196 223
sell
 Exhibit 2
Particulars January February March
Revenue
Intra-company 82400 72400 89200
sales
Commercial sales 98400 108000 110400
Total revenue 180800 180400 199600
Expenses
Space costs:
Rent 8000 8000 8000
Custodial services 1240 1240 1240

9240 9240 9240

Particulars January February March
Equipment cost
Computer leases 95000 95000 95000

Maintenance 5400 5400 5400

Depreciation:
Computer 25500 25500 25500
equipment

Office equipment 680 680 680

and fixtures

Power 1546 1485 1697

128126 128065 128277
Particulars January February March
Wages and
salaries
Operations: 21600 21600 21600
salaried staff
Operations: 7896 7584 8664
hourly personnel
Systems dev. & 12000 12000 12000
maintenance
Administration 9000 9000 9000

Sales 11200 11200 11200

61986 61384 62464

Sales promotion 7909 7039 8083
Corporate 15424 15359 15236
services
Total expenses 222395 221087 223300
Net income(loss) (41595) (40687) (23700)
 Question 1
 Revenue hours represent the key activities that
drives cost at SDS. Which expenses in Exhibit 2
are variable with respect to revenue hours?
 Which are fixed expenses with respect to
revenue hours?
 Variable expenses

Power 1546 1485 1697

Operations: 7896 7584 8664

hourly personnel
Fixed expenses
 Rent 8,000

 Custodial services 1,240

 Computer leases 95,000

 Maintenance 5,400

 Depreciation 26,180

 Salaried staff 21,600

 System development 12,000

 Administration 9,000

 Sales 11,200

 Sales promotion 8,083

 Corporate services
 Question 2
 Calculate variable cost per revenue hour
 Question 3
 Create a contribution margin
income statement for SDS assuming
that intra-company usage is 205
hours and commercial usage is at
March level
 Question 4
 Level of commercial hours for break even?

•If commercial price is increased to $1000, the

demand reduces
30%, then the effect on net income will be?
•If the commercial price is reduced to $600, the
demand increases 30%. The result of net income
will be?

•By increasing 30% commercial hours by

increasing sales promotion
 Question 6
 Is SDS really a problem to STC?
 What should Flores do about SDS?
1. Use pricing strategy to increase commercial revenue
hours
This method will not add extra costs. However,
according to our estimation above, changing price to
either $1000 (97 hours) or $600 (180 hours) can not
prevent a net loss.
2. Increase sales promotion cost to win more business
but the price unchanged
If SDS wants to increase 30% of commercial sales, the
extra promotion costs can not be exceed $2012.
Considering the promotion cost $8083 on March,
additional $2012 is roughly 24.9%. That is, SDS can only
If SDS is closed

Saved
expenses
 Conclusion
 STC can only save $85644 by closing SDS, but it
needs to spend $164000 to purchase service
from outside
 In other words, STC needs to pay extra $78356
if SDS does not exist; therefore STC should
keep SDS business
 It should get to the break even point
 It should increase the promotion budget and
also reduce price, which will make SDS become
profitable more easily
THANK
YOU