...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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...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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...SUMMARY Salem Telephone Company operates as a regulated public utility. The state Public Service Commission (PSC) permitted Salem to establish a wholly owned subsidiary to provide computer services to other companies for a profit. The reason for the separate entities was so Salem Data Services could sell services unregulated and Salem Telephone could operate without raising rates. In 2000, the initial report to the PSC from the president of Salem Telephone was to convince them that the public entity, Salem Data Services, would become profitable and would end the need to raise telephone rates. By 2003, Salem Data had not turned a profit. Mr. Flores requested a meeting with the manager of Salem Data, Ms. Wu, so some type of action would be taken to “reduce the drain on Salem Telephone Company resources” (Bruns, Jr. & Hertenstein, 2005). The analysis that follows will show that Salem Data Services will not be a problem to Salem Telephone and eventually make a profit by spending more on promotional activities to increase commercial hours, and by moving fixed costs into variable costs. ANALYSIS Salem Data’s variable expenses with respect to revenue hours are power expense and hourly salary. Their fixed expenses for revenue hours are rent, custodial services, computer leases, maintenance, depreciations of computer and office equipment and fixture, operations salaried staff, system development and maintenance, administration, sales, sales promotion and...
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...Ed Kiefer Chapter 4 4-5 10500-8500/900000-300000 2000/600000= .003 8500-(.003x300000) Low 8500-900=7600 Copies 20500-(.003x900000) High 20500-2700=17800 Copies 4.8 Variable costs Staff Salaries 33000 Office supplies 300 Total 33300 Fixed costs Manager salaries 8000 Dep of equip 400 Share of building Costs 2000 Total 10400 Variable Total 33300/70 $475.72 Fixed Total 10400/70 148.57 4-12 Break even point FC=$300,000 VC per Dollar= $.40 $300,000x.40=$120,000 Variable cost 4-17 0=2,035,000(x)-1,340,000 0=695000/2035000 34% Sales increase 15%=2,035,000x.15=305250 Sales=$2,950,750 0=2,950,750-1,340,000 1355750/2950750 45% Because we only increased profits and did not add to fixed or Variable cost. 4-18- Selling price A= $90 Selling price B=$80 Less Variable Costs= $30 Less Variable Costs= $44 Contribution margin= 60 Contribution Margin=$36 Labor Hours A= 6 Labor Hours b=3 Contribution Margin Per Hour A= $10 Contribution Margin Hours Per B=$12 Contribution Margin Given Contribution Margin Given 350 Hours= $3500 ...
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...Salem Telephone Company • • • • C.V. Hareesh Naidu V.Venkata Surya Teja B. Asheesh Kumar M. Rohit Kumar 186 168 032 Salem Telephone Company • Subsidiary : Salem Data Services • Data processing service provider for the telephone company. • Sell computer services to other companies. • Initially started to reduce telephone rate hikes. • Currently running in losses • Mr. Flores wished to have a wholly owned entity rather than a public utility company. • Average monthly charge for services by the subsidiary to parent should be less than $82,000 Problems • • • • Delayed equipment deliveries. Higher salary expectation by the personnel. Hard to find customers than expected. Lowest return on investment in 7 years. Fixed and Variable Costs of Salem Data Services Fixed Costs: o Rent o Custodial services o Computer leases o Maintenance o Computer equipment and fixtures o Salaried staff o Systems development and maintenance o Administration o Sales o Sales promotion o Corporate services Variable Costs: o Power o Hourly personnel • Power: Costs($) Cost per revenue hour for each variable expense January 1546 329 4.7 February 1485 316 4.7 March 1697 361 4.7 Total revenue hours Cost per revenue hour($ per hour) • Hourly Personnel: January Costs($) Total revenue hours Cost per revenue hour($ per hour) 7,896 329 24 February 7,584 316 24 March 8,664 361 24 Contribution margin intra company Usage(hours) Selling price per hour($) total sales Variable...
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...Salem Telephone Company SUMMARY: Peter Flores, President of Salem Telephone Company decided to create a subsidiary in the form of an unregulated data services company called Salem Data Services in 2000. Flores belief was that with the company unregulated it would become a profitable business and prevent the need, in the future, to increase phone rates due to increasing costs at Salem Telephone. Originally the company only provided intra-company services for Salem Telephone, however after management realized that there was a market in the metropolitan area for the computer time that was not used by Salem Telephone they decided to sell it to the commercial market. The only stipulation was that the Public Service Commission restricted the average monthly services charged provided by Salem Data Services to Salem Telephone not to exceed $82,000. DISCUSSION: The company had difficulties at the onset as expected such as finding fewer customers than originally expected. Although this problem was alleviated by 2003, the Salem Data Services remained unprofitable and continued to have a large amount of hours available to sell. As far as pricing, the intrapersonal hours were $400 dollars per hour while the commercial hours were priced at $800 per hour. In addition the Data Company had several costs but many at a discounted rate from what an independent company would pay due to its relationship with the Telephone Company. In fact the Data Company had no expenses with...
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...Salem Telephone Company • • • • C.V. Hareesh Naidu V.Venkata Surya Teja B. Asheesh Kumar M. Rohit Kumar 186 168 032 Salem Telephone Company • Subsidiary : Salem Data Services • Data processing service provider for the telephone company. • Sell computer services to other companies. • Initially started to reduce telephone rate hikes. • Currently running in losses • Mr. Flores wished to have a wholly owned entity rather than a public utility company. • Average monthly charge for services by the subsidiary to parent should be less than $82,000 Problems • • • • Delayed equipment deliveries. Higher salary expectation by the personnel. Hard to find customers than expected. Lowest return on investment in 7 years. Fixed and Variable Costs of Salem Data Services Fixed Costs: o Rent o Custodial services o Computer leases o Maintenance o Computer equipment and fixtures o Salaried staff o Systems development and maintenance o Administration o Sales o Sales promotion o Corporate services Variable Costs: o Power o Hourly personnel • Power: Costs($) Cost per revenue hour for each variable expense January 1546 329 4.7 February 1485 316 4.7 March 1697 361 4.7 Total revenue hours Cost per revenue hour($ per hour) • Hourly Personnel: January Costs($) Total revenue hours Cost per revenue hour($ per hour) 7,896 329 24 February 7,584 316 24 March 8,664 361 24 Contribution margin intra company Usage(hours) Selling price per hour($) total sales Variable...
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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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...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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...Salem Telephone Company 1.Variable Cost: Power, Operations: hourly personnel. Fixed Cost: Space cost-rent, Custodial services, Computer leases, Maintenance, Computer equipment depreciation, Office equipment and fixtures depreciation, Operations: salaried staff, systems development and maintenance, Administration, sales, sales promotion, Corporate services. 2. Cost per revenue hour=Cost/revenue hour Power: January: 1546/329=4.6991 February: 1485/316=4.6994 March: 1697/361=4.7008 Operations: Hourly personnel: January: 7896/329=24 February: 7584/316=24 March: 8664/361=24 3.Total Revenue Hour=Intracompany Usage+ Commercial Revenue Hour=205+138=343Hours According to the reading, intracompany work was billed at $400 per hour and commercial sales were billed at $800 per hour, so the total sales should equals 400*205+800*138=192,400 Variable Cost=Revenue Hours*Variable Cost per Revenue Hour =24*343 + 4.7*343 =9844.1 Fixed Cost=the sum of all of the fixed cost (Because Sales Promotion and corporate services are commercial usage, so calculating them at March level) = 8000 +1240 +95000 +5400 +25500 +680 +21600 +12000 +9000 +11200 +8083 +15236=212,939 Contribution Margin Income Statement Sales 192,400 Variable Costs (9844.1) Contribution Margin ...
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...Managerial Accounting Salem Telephone Company Question 1 Fixed Expenses: * Rent * Custodial services * Computer leases * Maintenance * Computer equipment * Office equipment and fixtures * Salaried staff * Systems development and maintenance * Administration * Sales * Sales promotion * Corporate services * Variable Expenses: * Power * Hourly personnel Question 2 Question 3: Income Statement Date | March | Revenues | | | Intracompany sales | $82,000 | | Commercial sales | $110,400 | | | Total revenue | $192,400 | Variable Cost | | | | | Power | | ($1,612.10) | | Hourly Personnel | ($8,232.00) | | | Total variable cost | ($9,844.10) | | | | | | Contribution Margin | $182,556 | | | | | | Fix Cost | | | Space costs: | | | | Rent | ($8,000) | | | Custodial services | ($1,240) | | Equipment costs: | | | | Computer leases | ($95,000) | | | Maintenance | ($5,400) | | | Depreciation: | | | | | Computer equipment | ($25,500) | | | | Office equipment and fixtures | ($680) | | Wages and salaries: | | | | Operations: salaried staff | ($21,600) | | | Systems development and maintenance | ($12,000) | | | Administration | ($9,000) | | | Sales | ($11,200) | | Sales promotion | ($8,083) | | Corporate services | ($15,236) | | | Total Fix Cost...
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...1. 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? A) Variable with respect to revenue hours Hourly personnel Salaries expense Power Expense B) Fixed expenses with respect to revenue hours: Rent Custodial services Computer leases Maintenance Depreciation of computer equipment, office equipment and fixtures Operations salaried staff Systems development and maintenance Administration and sales Sales promotion Corporate services 2. For each expense that is variable with respect to revenue hours, calculate the cost per revenue hour. Power Hourly Personnel Salaries Overall Cost January 1546/329=4.7 7896/329=24 =24+4.7=28.7 February 1485/316=4.7 7584/316=24 =4.7+24=28.7 March 1697/361=4.7 8664/361=24 =24+4.7=28.7 3. Create a contribution margin income statement for Salem Data Services; Assume that intra company usage is 205 hours, Assume commercial usage is at the March Level. Revenue Variable costs Contribution Margin Fixed Costs Operating Income (loss) From the case we know that intracompany work was billed at $400 per hour, and commercial sales were billed at $800 per hour. Commercial 138*$800=$110,400 138*$28.70=$3960.60 ($800-28.7)*138= $106,439.40 Intracompany 205*$400=$82...
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...Salem telephone case 1. ”Revenue hours” represent the key activity that drives costs at Salem Data Service . Which expenses in Exhibit 2 are variable with respect to revenue hours? Which expenses are fixed with respect to revenue hours? A : Variable costs : The power, hourly personal. Fixed costs : The rent, custodial service, computer leases, maintenance, computer equipment, office equipment and fixtures, salaried staff, system development and maintenance, administration, sales promotion, Corporate service. 2. For each expense that is variable with respect to revenue hours, calculate the cost per revenue hour. A : | |January |February |March | |Total revenue hours |329 |316 |361 | |Power |1546 |1485 |1697 | |Hourly personal |7896 |7584 |8664 | |Variable cost per revenue hour |28.699 |28.699 |28.700 | 3. Create a contribution margin income statement for Salem Data Service. Assume that intracompany usage is 205 hours. Assume commercial usage at the March level. A : From the text, we know...
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...800 | $53,800 | 53,800 | TOTAL FC | $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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...Appendix H- “What if” Analysis 13 Executive Summary Since 2001, Salem Data Services has been operating at a net loss. After review the reports from first quarter 2004, it has become apparent that action will be necessary. Through our examination of the first quarter 2004 reports, we have concluded three key areas to focus on. These include utilization of computer usage hours, how the results of the operations have been unprofitable, and how sales promotions are not tied to current levels of work. Our analysis begins with careful inspection of the variable and fixed costs of Salem Data Services. It is clear the variable costs equaling $32,640, do not contribute enough to covering the total fixed costs of $189,620. The other focus of the analysis lies in the re-evaluating the usage hours available for Commercial Sales. Currently the level of Commercial Sales is under utilized. Available hours need to be maximized to eliminate the current loss and begin to show growth and profit. We have included data that will prove by increasing Commercial usage hours; the break-even point can be achieved. Overall, we do believe in the ability of Salem Data Services to become a profitable subsidiary of Salem Telephone Company. We do not believe it is necessary to shut down operations or sell Salem Data Services. The opportunity costs from Intra-Company sales and the expenses paid to Salem Telephone...
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