Prestige Data Services Cost Volume Profit Analysis
The following equation has been used for the purpose of this analysis:
(Intra-company sales + commercial sales) = Fixed Cost + Variable Cost/hour * time (in hours)
To work out only the contribution of intra-company and commercial computer use, “Other commercial sales” has been removed from the revenue. To counter that, “Materials cost” has been removed from the costs; three month average for these parameters is approximately equal.
Fixed Costs = $212939
Rent ($8000),
Custodial Services ($1240),
Computer Leases ($95000),
Maintenance ($5400),
Computer Equipment Depreciation ($25500),
Office Equipment and Fixtures ($680),
Fixed component of Operations (6*$3600 = $21600),
System development and maintenance ($12000),
Admin ($9000),
Sales ($11200),
Sales Promotion ($8083), and
Corporate Services ($15236).
Variable Costs = $29/hour
Variable component of Operations ($24 per hour),
Power ($5/hour) – calculate from March power cost divided by March computer use, assuming only billable computer use is to be used for this variable cost.
Revenue = $82000 + N* $800/hr (where N is number of commercial sales hours)
Intra-company sale of $82000 per month at $400/hour translates to 205 intra-company sales hours per month.
Hence, for breaking even:
$82000 + $800 * N = $212939 + (205 hours + N) * $29
This gives us N = 177.54 hours, and gives us Break even revenue of $142032.68.
Thus, to be run as a viable business at current prices, Prestige Data Service needs to increase its commercial computer use hours to at least 178 hours per month from its current average of 132 hours per month.
Effects on income from Bradley’s estimates (based on Rowe’s suggestions) are given below:
Option a. increasing price of commercial computer use to $1000, potentially reducing demand by 30%
New price for commercial