Charles Steiner Salem Telephone Company Case Analysis

7 October 2015

1. Using exhibit two, the variable expenses with respect to revenue hours are power and hourly personnel salaries. The fixed expenses are: rent, custodial services, computer leases, maintenance, depreciation of equipment and fixtures, operations salaried staff, systems development/maintenance, administration, sales promotion and corporate services. 2. Power expense for January, February, and March are 4.7 dollars per hour. Personnel salaries expense for January, February, and March are 24 dollars per hour. Total variable cost per revenue hour for all three months is 28.7 dollars per hour. See appendix for calculations (number 2) 3. Salem Telephone Company Income Statement

For the period of March Sales Revenue

$192,400

Less Variable Cost

$9,844.1

Contribution Margin

$182,555.9

Less Fixed Cost

$212,939

Net Loss

($30,383.1)

See appendix for calculations (number 3) 4. With intercompany demand at 205 hours, Salem Data services will need to have at least 177.39 or 178 commercial revenue hours to break even.

See Appendix for calculations (number 4)

5. See appendix for calculations (number 5) Flores suggested three options to Salem Data to increase their bottom line. In option one Flores suggests increasing commercial hourly price to $1000. Factoring in the decrease in demand, the result is a net loss of $42,994.92. In option two, commercial hourly prices would be reduced to $600. Even with the increase in demand, the result is still a net loss of $34,331.28. In option three the resulting increase in demand yields a net income of $1,548.72. This means that the proposed promotion in order to increase demand cannot exceed $1,548.72 for it to be beneficial. These options show the difficulty in turning Salem Data profitable for Salem Telephone.

6. After analyzing Salem Data and various options achieve a net income, I have concluded that it would be best to close Salem Data. Salem telephone would then need to purchase 205 intercompany hours from another company, totaling to $164,000. This is $59,000 less than the roughly $223,000 a month it takes to operate and run Salem data. Salem Data has been operating at a net loss for the three listed months, and would need a lot of work to make profitable. I recommend Salem Telephone to drop Salem Data and purchase their 205 hours from a third party.

Appendix