Case Study Analysis: Salem Telephone Company

Contents

Summary 2
Analysis 2
Questions 3
Recommendations 5
Works Cited 6

Summary

In 2000, Peter Flores, president of Salem Telephone Company (STC) told the Public Service Commission that a profitable computer service subsidiary would reduce pressure for telephone rate increases. Once approval was received from Public Service Commission, STC, a regulated public utility, established Salem Data Services (SDS) in 2001, an unregulated wholly owned subsidiary, to perform data processing for the telephone company and, additionally, to sell computer services to other companies and organizations in its immediate metropolitan region. Following three years of operations, SDS has not been able to post profits and the president of STC is now faced with a challenge of whether the subsidiary SDS will be a profitable business venture. The president of STC, Peter Flores, is preparing to meet with Cynthia Wu, manager of SDS, to assess and determine the profitability of the subsidiary SDS. Our group’s tasks are to:

▪ analyze and review common cost behavior, distinguishing different types of costs (variable or fixed) as they pertain to business activities;

▪ construct a contribution margin income statement;

▪ review net income relative to reduction and commercial price increases; and

▪ formulate recommendations to the president of STC based on our financial analysis on whether or not it is more profitable to keep the subsidiary SDS.

Analysis

Utilizing incremental analysis, we will calculate the delta in costs and revenues between alternate decisions. Once we determine the actual fixed cost and variable costs, our group will be able to then calculate the unit costs per commercial revenue hours.

In reviewing Exhibit 2 (case study), we determine that only “Power”