...James Whittle Salem Telephone Company Case Study 9/29/2014 1.) The variable costs in Exhibit 2 are Power and Hourly Personnel Wages as the costs fluctuate from month to month and are driven by the revenue hours for the company. The fixed costs in Exhibit 2 are Rent, Custodial Services, Computer Equipment Leases, Computer Maintenance, Computer Depreciation, Office Equipment and Fixtures Depreciation, Salaried Staff Wages, Systems Development and Maintenance, Administrative Wages, Sales Wages, Sales Promotion, and Corporate Services. Rent, Custodial Services, Computer Equipment Leases, Computer Maintenance, Computer Depreciation, Office Equipment and Fixtures Depreciation, Salaried Staff Wages, Systems Development and Maintenance, Administrative Wages, and Sales Wages are all obviously fixed because the expenses do not vary monthly. However, Sales Promotion and Corporate Services expenses change monthly, but the change is not dependent on revenue hours. Therefore, they are fixed with respect to revenue hours. 2.) The calculations for variable costs with respect to revenue hours are as follows: | January | February | March | Total Power Expense | $1,546 | $1,485 | $1,697 | Total Revenue Hours | 329 | 316 | 361 | Total Variable Cost per Revenue Hour | $4.70 | $4.70 | $4.70 | | | | | | January | February | March | Total Hourly Personnel Wages Expense | $7,896 | $7,584 | $8,664 | Total Revenue Hours | 329 | 316 | 361 | Total Variable Cost per...
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...1. Operations wages for hourly personnel and office equipment and fixtures are the only variable cost with respect to revenue hours. All other costs are fixed with respect to revenue hours. With higher fixed cost, Salem Data Services has a higher leverage and is therefore riskier. 2. ($7,896 + $1,546) / 329 hours = $28.70 / hour. For every hour spent working, the company spends 28.70 dollars. 3. Intracompany Commercial Total Number of Hours (a): 205 138 343 Revenue (a x b): $82,000 $110,400 $192,400 Variable Costs (a x c): ($5,883.50) ($3,960.60) ($9,844.10) Contribution Margin: $76,116.50 $106,439.40 $182,555.90 Fixed Costs: ($212,939) Net Income: ($30,383.10) 4. Commercial fixed cost = total fixed cost – intracompany fixed cost CFX = $212,939 – (76,116.50) = $136,822.50 (SP/unit * # of units sold) = (VC/unit * # of units sold) + FC $800x = $28.70x + $136,822.50 $771.3x = $136,822.50 x= 177.39 hours 5. Increase price to $1000 Intracompany Commercial Total Number of Hours (a): 205 96.6 301.6 Revenue (a x b): $82,000 $96,600 $178,600 Variable Costs (a x c): ($5,883.50) ($3,960.60) ($9,844.10) Contribution Margin: $76,116.50 $92,639.40 $168,755.90 Fixed Costs: ($212,939) Net Income: ($44,183.10) Decrease price to $600 Intracompany Commercial Total Number of Hours (a): 205 179.4 384.4 Revenue (a x b): $82,000 $107,640 $189,640 Variable Costs (a x c): ($5,883...
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...HBS case – Salem Telephone Company Opening In 2000 the Public Service Commission (PSC) was informed by the president of Salem Telephone Company (STC) that a profitable computer service subsidiary would reduce pressure for increases to telephone rates. With approval from the Public Service Commission, STC, a regulated public utility, established Salem Data Services (SDS) in 2001, an unregulated public utility to perform data processing for the telephone company and additionally to sell computer services to other companies and organizations in its’ immediate metropolitan region. After three years of operations SDS has yet to finalize a month in positive numbers and the president of STC is faced with the challenge of whether the subsidiary, SDS can be a profitable business. As Peter Flores, president of STC is preparing to meet with Cynthia Wu, manager of SDS, our group will review some common cost behaviors associated with distinguishing different types of costs; whether fixed or variable relevant to activity, construct a contribution margin income statement, review net income relative to reduction and increases to commercial price, and finally based on our financial analysis of SDS, make specific recommendations to the president of STC as to whether it is more or less profitable to keep the subsidiary SDS. With Incremental analysis we will be able to calculate the differences in revenue and costs between decision alternatives. Determining the actual fixed and variable costs...
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...Salem Telephone Company Case Study Salem Telephone Company Case Study Introduction Salem Data Service, SDS, is a vital asset to Salem Telephone Company. Even though there are losses occurring, SDS has begun to increase performance and losses have been decreasing over the last several months. Background Salem Telephone Company needed computer services to plan, control, and account for operations so it created Salem Data Service, SDC. Because Salem Telephone Company was a regulated utility, it needed to gain approval for this venture. This new subsidiary would be separate but wholly owned by Salem Telephone Company. Salem Data Service was allowed to compete with other computer service organizations, but it could not charge Salem Telephone Company more than $82,000. Both companies would pay each other for services rendered. Key Problems Revenue and cost data in the quarterly review revealed the lowest return on investment in seven years. Flores is reluctant to shut down or sell SDS, but feels that it is time to reassess SDS profitability. He has scheduled a meeting with Wu to discuss 3 possible scenarios. Alternatives Flores is contemplating asking Wu to estimate the effects on profit from increasing price to customers; not including Salem, reducing price, and increasing sales efforts. 1) Which expenses are variable and which are fixed with respect to revenue hours Fixed cost in respect to revenue hours: Rent ($8,000) Custodial services ($1,240) Computer...
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...Salem Telephone Company – Case Study Summary In 2001 Salem Telephone established a subsidiary, Salem Data Services, for the purpose of performing data processing services for the telephone company and to meet this need for other companies. By 2003 Salem Data Service had finally overcome the problems experienced during startup and was running smoothly but their reporting had yet to show a profitable month. Peter Flores, president of Salem Telephone Company was discouraged by the presented results to date; however he was reluctant to suggest to Cynthia Wu, manager of Salem Data Services, that Salem Data be closed down or sold. He thought that the opportunity to have this subsidiary seemed too good to give up easily. Flores questioned whether the accounting reports truly painted a clear picture of the contribution that Salem Data Services was making to Salem Telephone. In other situations he had reviewed in the past, he felt that the procedure used in accounting for separate activities in the company tended to obscure the costs and benefits they provided. A review of the financial data shows Salem Data with an average monthly operating loss of almost approximately $35,000 in the first quarter. However, if Flores factors in the $82,000 savings Salem Telephone received in March as a result of the $400/hour discount on data services as well as the $8,000 Salem Telephone received in rent from Salem Data, the company still proves itself to be a valuable commodity. If Salem Telephone...
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...Salem Telephone Company Case Study 1. Variable Expenses with respect to revenue hours: Power expense, hourly personnel salaries expense. Fixed expenses with respect to revenue hours: Rent, custodial services, computer leases, maintenance, depreciation of computer equipment and office equipment and fixtures, operations salaried staff, systems development and maintenance, administration, and sales, sales promotions, corporate services. 2. Units: dollars per hour January February March Power expense 4.7 4.7 4.7 personnel salaries expense 24 24 24 Total Variable cost per revenue hour 28.7 28.7 28.7 3. Income statement for Salem Data Services From the article, I know that intracompany work was billed at $400 per hour, and commercial sales were billed at $800 per hour. So, intracompany contribution margin: $400-$28.7= $371.3/hr Commercial contribution margin: $800-$28.7=$771.3/hr Sales revenue $192,400 Variable cost $9844.1 Contribution margin $182,555.9 Fixed cost $212,939 Net loss ($30,383.1) 4. Revenue = Variable Costs + Fixed Costs 205(400) + X (800) =(X+205) (28.7) +212,939 X= 177.39 commercial hours sold to break-even 5. Original March: P= Net Income= ($23,700) For option 1: P=205(400)+1000(96.6)-301.6(28.7) -212,939= -42,994.92 For option 2: P=205(400) +600(179.4)-384.4(28.7) -212,939= -34,331.28 For option 3: P=205(400) +800(179.4)-384.4(28.7) -212,939 = 1548.72 In conclusion, for option1 and 2, both will decrease in net income. For option3, net income will increase to a benefit...
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...Salem Telephone Company Managerial Accounting Case Study 1: Salem Telephone Company 96122050 96122051 96122052 96122073 96122085 96122088 96122092 Group 1 Through our study of Salem Telephone Company (STC), we’re going to answer that if Salem Data Services (SDS) is really a profitable business to keep by using break-even point analysis. Before we come out the final solution, let’s discuss SDS’ accounting report step by step. First, we have to divide the various costs incurred in SDS into two types: variable costs and fixed costs. From Exhibit 2 we can see that only “Power” and “Operations: hourly personnel” are variable costs that have relation to the total revenue hours. Other expenses listed in Exhibit 2 are all fixed costs (Q1). Besides, we can calculate the unit variable costs per revenue hour as follows (Q2): January 1,546 7,896 9,442 329 28.70 February 1,485 7,584 9,069 316 28.70 March 1,697 8,664 10,361 361 28.70 Power Operations: hourly personnel Total variable costs Total revenue hours Variable costs per revenue hour Furthermore, by distinguish the variable costs and fixed costs, we can construct the contribution margin income statement for SDS at March level, assuming 205 hours for intracompany usage (Q3): Revenues Intracompany 82,000 Commercial 110,400 Total Revenues 192,400 Variable expenses (power + hourly personnel) 9,844 Contribution margin 182,556 Fixed expenses Rent 8,000 Custodial services 1,240 Computer leases 95,000 Maintenance 5,400 Depreciation...
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...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...
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...Managerial Accounting Case Study 1: Salem Telephone Company 96122050 96122051 96122052 96122073 96122085 96122088 96122092 Group 1 Through our study of Salem Telephone Company (STC), we’re going to answer that if Salem Data Services (SDS) is really a profitable business to keep by using break-even point analysis. Before we come out the final solution, let’s discuss SDS’ accounting report step by step. First, we have to divide the various costs incurred in SDS into two types: variable costs and fixed costs. From Exhibit 2 we can see that only “Power” and “Operations: hourly personnel” are variable costs that have relation to the total revenue hours. Other expenses listed in Exhibit 2 are all fixed costs (Q1). Besides, we can calculate the unit variable costs per revenue hour as follows (Q2): January 1,546 7,896 9,442 329 28.70 February 1,485 7,584 9,069 316 28.70 March 1,697 8,664 10,361 361 28.70 Power Operations: hourly personnel Total variable costs Total revenue hours Variable costs per revenue hour Furthermore, by distinguish the variable costs and fixed costs, we can construct the contribution margin income statement for SDS at March level, assuming 205 hours for intracompany usage (Q3): Revenues Intracompany 82,000 Commercial 110,400 Total Revenues 192,400 Variable expenses (power + hourly personnel) 9,844 Contribution margin 182,556 Fixed expenses Rent 8,000 Custodial services 1,240 Computer leases 95,000 Maintenance 5,400 Depreciation 26,180 Salaried staff...
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...Salem Telephone Company Case Study 1. Variable Expenses with respect to revenue hours: Power expense, hourly personnel salaries expense. Fixed expenses with respect to revenue hours: Rent, custodial services, computer leases, maintenance, depreciation of computer equipment and office equipment and fixtures, operations salaried staff, systems development and maintenance, administration, and sales, sales promotions, corporate services. 2. Units: dollars per hour January February March Power expense 4.7 4.7 4.7 personnel salaries expense 24 24 24 Total Variable cost per revenue hour 28.7 28.7 28.7 3. Income statement for Salem Data Services. From the article, I know that intracompany work was billed at $400 per hour, and commercial sales were billed at $800 per hour. So, intracompany contribution margin: $400-$28.7= $371.3/hr Commercial contribution margin: $800-$28.7=$771.3/hr Sales revenue $192,400 Variable cost $9844.1 Contribution margin $182,555.9 Fixed cost $212,939 Net loss ($30,383.1) 4. Revenue = Variable Costs + Fixed Costs 205(400) + X (800) =(X+205) (28.7) +212,939 X= 177.39 commercial hours sold to break-even 5. Original March: P= Net Income= ($23,700) For option 1: P=205(400)+1000(96.6)-301.6(28.7) -212,939= -42,994.92 For option 2: P=205(400) +600(179.4)-384.4(28.7) -212,939= -34,331.28 For option 3: P=205(400) +800(179.4)-384.4(28.7) -212,939 = 1548.72 In conclusion, for option1 and 2, both will decrease in net income. For...
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...Salem Telephone Co Case Study #2 Overview: Salem Telephone Company (STC) is a telephone company who is regulated by the state Public Service Commission. The state Public Service Commission encouraged public utilities under its jurisdiction to seek new sources of revenue and profits. This would reduce the need for rate increase that higher costs would otherwise bring. The company formed an agreement with the state Public Service Commission to create a subsidiary. Thus Salem Data Services (SDS) was created to perform data processing for the telephone company and sell computer products and services to other companies and organizations. The separation between the companies is because STC was a regulated utility and SDS is an unregulated company. The only restriction the state Public Service Commission had was the average monthly charges for services provided by SDS to STC is not to exceed $82,000. This was the estimated cost of equivalent services used by STC in the year 2000. With retaining the separation between the two companies all accounts of SDS were separated from STC. Lastly, each company paid the other for services from the other. During April 2004 the president of STC, Peter Flores met with SDS’s manager Cynthia Wu to discuss the condition of the company. SDS currently has yet to have a profitable month, but Wu feels the company is progressing well and needed more time to show profits. This raised a concern for Flores. Also, in 2003 STC’s income was at an all-time...
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...$189,620 | $189,620 | $189,620 | 2) Cost per Revenue Hour for Variable Expenses: Revenue Hours> | January329 | February316 | March361 | Power | $1546 | $1485 | $1697 | Cost/Revenue Hr. | $4.70/hr. | $4.70/hr. | $4.70/hr. | Hourly Personnel | $7896 | $7584 | $8664 | Cost/Revenue Hr. | $24/hr. | $24/hr. | $24/hr. | Corporate Services | $15,424 | $15,359 | $15,236 | Cost/Revenue Hr. | $46.88 | $48.60 | $42.20 | Sales Promotions | $7,909 | $7,039 | $8,083 | Cost/Revenue Hr. | $24.04/hr. | $22.28/hr. | $22.39/hr. | 3) Contribution margin income statement for Salem Data Services Assumption: Intra company usage=205 hours; Commercial usage for March=138 hours Revenue Hours Intra company: 205 Commercial: 138 Total Revenue Hours: 343 Salem Data Services Income Statement | | Revenues | | Intra company sales | $82,000 | Commercial Sales | 110,400 | TOTAL REVENUE | $192,400 | | | LESS Variable Expenses | | Power | $1612.10 | Hourly Personnel | 8,232 | Corporate Services | 14,474.60 | Sales Promotions | 7,679.77 | TOTAL VARIABLE COSTS | $31,998.47 | CONTRIBUTION MARGIN | $160,401.53 | | | LESS FIXED EXPENSES...
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...Salem Telephone Company Case No. 9-104-086 Group #4 John Pipkin Resean Crawley Chan Srinivasa Brian Hamilton Question 1 The fixed cost associated with Salem Data Services are: Item Expenses Space cost: Rent Custodial services Equipment costs Computer leases Maintenance Depreciation: Computer equipment Office equipment and fixtures Wages and salaries Operations: salaried staff Systems development and maintenance Administration Sales Sales promotion Corporate services Total January February March $ $ 8,000.00 $ 1,240.00 $ 8,000.00 $ 1,240.00 $ 8,000.00 1,240.00 $ 95,000.00 $ 95,000.00 $ 95,000.00 $ 5,400.00 $ 5,400.00 $ 5,400.00 $ 25,500.00 $ 25,500.00 $ 25,500.00 $ 680.00 $ 680.00 $ 680.00 $ $ $ $ $ $ $ 21,600.00 12,000.00 9,000.00 11,200.00 7,909.00 15,424.00 212,953.00 $ $ $ $ $ $ $ 21,600.00 12,000.00 9,000.00 11,200.00 7,039.00 15,359.00 212,018.00 $ $ $ $ $ $ $ 21,600.00 12,000.00 9,000.00 11,200.00 8,083.00 15,236.00 212,939.00 The variable cost associated with Salem Data Services are: Item Equipment costs Power Wages and salaries Operations: hourly staff Total January $ $ $ February March 1,697.00 1,546.00 $ 7,896.00 $ 9,442.00 $ 1,485.00 $ 7,584.00 $ 8,664.00 9,069.00 $ 10,361.00 Question 2 The revenue hours associated with the variable costs are linked to the figures in Exhibit 1 January Number of weekdays (M-F) X 24 hours per day Number of Saturdays X 8 hours per day Total hours available for revenue Revenue hours Intracompany Commercial...
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...Case Study #1. Salem Telephone Company 1. Variable expenses: Power (the more hours sold, the more energy consumed) The hourly personnel (operations) works only when the computers are in operation Fixed expenses: The rent has to be paid despite any level of production ($8,000 monthly) The custodial services depend on Salem Telephone's estimated space, they are independent from the revenue of the Company The computer leases were acquired to run the business (before it was actually started up) The maintenance is necessary even when you do not produce/sell anything The deprecation depends on the number of years not on the number of hours sold Operations: salaried stuff consists of the six people necessary to run the center (the number of people remains the same) Systems development and maintenance the system needs to be developed and maintained constantly to keep the work in process Administration: the salaries are paid on a fixed regular basis Sales promotion: there is a certain amount of money that has been allocated on advertising Corporate services are independent from revenue (are obtained when needed) Sales (should equal an estimated amount) 2 2. January 1,576 7.896 329 4.7 March 4,485 7,584 316 4.7 February 1,697 8,664 361 4.7 24 24 24 28.7 Power Hourly personnel Total Rev. hours VC/Revenue hour (Power) VC/ Revenue hour (personnel) Total Variable Cost/ hour 28.7 28.7 Variable cost per revenue hour...
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...Seligram, Inc.: Electronic Testing Operations 1. What caused the existing system at ETO to fail? 2. Calculate the reported cost of the five components listed in Exhibit 6 using: a. The existing system. b. The system proposed by the accounting manager. c. The system proposed by the consultant. 3. Which system is preferable? Why? 4. Would you recommend any changes to the system you prefer? Why? 5. Would you treat the new machine as a separate cost center or as a part of the main test room? Bridgeton Industries: Automotive Component & Fabrication Plant 1. The official overhead allocation rate used in the 1987 model year strategy study at the Automotive Component and Fabrication Plant (ACF) was 435% of direct labor cost. Calculate the overhead allocation rate using the 1987 model year budget. Why do you get different numbers? 2. Calculate the overhead allocation rate for each of the model years 1988 through 1990. Are the changes since 1987 in overhead allocation rates significant? Why have these changes occurred? 3. Consider two products in the same product line: Product 1 Product 2 Expected Selling Price $62 $54 Standard Material Cost 16 27 Standard Labor Cost 6 3 Calculate the expected gross margins as a percentage of selling price on each product based on the 1988 and 1990 model year budgets, assuming selling price remains constant and material/labor costs do not...
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