1. Why did Salem Telephone Company form Salem Data Services?

The company was formed to perform data processing for Salem Telephone Company and also sell these services to other customers, because Telephone service is a regulated utility the profits from unregulated data processing services could be used to off-set costs of providing telephone service at regulated prices. This logic was approved by the Public Service Commission as long as the two companies were separate.

2. How long does it take a start-up company to become profitable?

The time period for a startup to become profitable is the same as the time it takes the company to develop sales/ revenue, which create enough total contribution margin to cover the fixed costs of the business

3. "Revenue hours" represent the key activity that drives costs at Salem Data Services. Which expenses in Exhibit 2 are variable with respect to revenue hours? Which expenses are fixed with respect to revenue hours?

Variable Expenses
Power
Operations: Hourly Personnel

Fixed Expense
Space Costs:
Rent
Custodial Services
Equipment Costs
Computer Leases
Maintenance
Depreciation
Computer Equipment
Office Equipment & Fixtures
Wages & Salaries
Operations: Salaried Staff
Systems development and maintenance
Administration
Sales
Sales Promotion
Corporate Services

4. For each expense that is variable with respect to revenue hours, calculate the cost per revenue hour. Calculate the total variable cost with respect to revenue hours.

5. Create a contribution margin income statement for Salem Data Services. Assume that intracompany usage is 205 hours. Assume commercial usage is at the March level.

6. Assuming the intracompany demand for service will average 205 hours per month, what