...1. Prestige Data Services is quite a problem to Prestige Telephone.This is because as it can be seen from the data, the Prestige Data Services is spending more than it is earning as it can be derived from the difference between total expenditure and total revenue. Further, the period that it had been allocated to prove profitable had already been exceeded and no worthy results were available which means even if the subsidiary was added more time little progress could be made. This is supported by the fact that the revenue keeps on fluctuating greatly which makes Bradley's request for more time questionable. 2. 3. a) An increase in price leads to a decrease in demand. Increasing the price of services to $1000 will make them unpopular leading to decreased revenue whereas the expenditure will remain fixed. Despite this, if the services being offered by Prestige Data Services are on high demand, an increase in price might not affect the demand of the service and revenue will increase hence profits will be realized making the subsidiary company worth keeping. b) Reducing the prices of services by $600 would increase the demand but the increase would be to a certain limit as the number of customers is limited. This is a good idea if only the cost of running the services is kept constant and the market is expanded. c) The cost of promoting their services should be kept at a level such that the revenue generated and boosted through promotions is able to contain the cost...
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...Text Preview I)Appraise the results of operations of Prestige Data Service. Is the subsidiary really a problem to Prestige Telephone Company? Consider carefully the differences between reported costs and cost relevant for decisions that Daniel Rowe is considering. 1.The prestige Data Services grew from the needs of the Prestige Telephone Company to meet their needs of data handling at the time but the problem now is that the company is still operating at a loss. But is that a problem for the parent company? We do not think so, if the Prestige Data Services does not exist anymore, the Prestige Telephone still have to pay for the cost such as: lease, maintenance, computer services..., but they get no contribution. In order to check if the data provided are relevant to make the decision at hand, the data has to satisfy the following criteria for it to be a relevant data. •It has to be an accepted future revenue or cost, •It must have an element of difference among the alternatives The future alternative may be to short down the site but some costs need to be considered- the cost of getting these services from another company, the loss of the corporate service revenue. Also there are benefits to be considered if this subsidiary is not existing, the vacated space could be used for another profitable purpose, since the parent company provide some services to the Data services, these services can be canceled, the employees can also be reduced thereby saving on labour costs. If...
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...become profitable. * President -Reduce the drain in company resources. Objectives * Analyze the results of operations. * Understand the economics of a business. * Forecast the potential change in income with each alternativesolution. * Understand cost information reporting. Issues * To continue or stop Prestige Data Services operation or separate as stand-alone entity from parent company since it isnot generating profit. * Consider changes in pricing or promotion that might improve profitability. * Reduce company resources wastage if any. * Reduce service hour from 24 hour to 2 shift per day. Question1 Solution * Non-cancelable leases on computer equipment havefour more years to run. * If Prestige shuts down the subsidiary it needs tooutsource data services from an outside vendor almost double the cost to present system. * Add back the depreciation (non-cash) the net lossconvert into profit in the month of March. * $800 per hour is acceptable price. * Opportunity costs rather than reported or historicalcosts should be used. And Prestige Data Services isnot really a problem to Prestige Telephone Co. * Reported cost includes total cost i.e. variable costand fixed cost. But in decision making only variablecost will be considered. * Reported Costs $160413 * Relevant Costs $61860 Question 2 Solution Break Even Point-Total Cost = Total Revenue January February March 231513-82000 229925-82000...
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...I, XXX, certify that: 1. I have reviewed this annual report on Form 10-K of "Prestige Investments"; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of "Prestige Investments" as of, and for, the periods presented in this annual report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for "Prestige Investments" and have: a) Designed such disclosure controls and procedures to ensure that material information relating to "Prestige Investments", including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) Evaluated the effectiveness of "Prestige Investments" disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) Presented in this annual report our conclusions about the effectiveness of the disclosure...
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...the first quarter of 2003, Prestige Data Services (PDS), a strategic subsidiary of Prestige Telephone, is showing a net loss of $75K. Their monthly revenues for the quarter have varied from $189K to $212K and their expenses have remained relatively flat around $222K each month. Table 1: High Level Q1 2003 Financials It might appear that the data subsidiary is continuing to lose money and should be considered as a candidate for elimination. However, that is NOT the case. The financials don’t show the true value of PDS to Prestige Telephone as a whole. First of all, the data processing services that PDS provides are necessary for Prestige Telephone’s operation and if they don’t buy them from PDS they will buy them from another third party. Those costs are estimated to be around $82K per month, much more than the data subsidiary’s monthly losses in Q1 2003. Second, there is significant strategic value in PDS to Prestige Telephone. Based on current regulatory restrictions, the telephone operation is unable to change rates charged to customers for its telephone services. At PDS, however, rates to external commercial customers can be changed. As the potential market for data processing still is believed to exist, this gives PDS the opportunity to better exploit that opportunity and turn the current losses into profits in the future. Lastly, the opening of the PDS subsidiary is viewed by the Public Utilities Commission as a step for Prestige Telephone towards deregulation...
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...CASE BACKGROUND • Prestige Telephone Company (PTC) is the parent company of Prestige Data Services (PDS) • PDS provides data services to its parent company as well as other companies willing to hire its services • It is wholly owned by PTC, but runs as a separate business entity, so each pays the other for services received • It was conceptualized in 1994, and started operations in 1995 • Daniel Rowe, president of PTC, was the one who pitched PDS, and believes it could be a profitable business • Since its inception, PDS has never been profitable, having multiple problems since the company’s launch • Susan Bradley, manager of PDS, believes the company only needs more time to be profitable • The case starts 1997, two years after the company was founded • PDS is separate entity from PTC, and is unregulated by the Public Service Commission • PTC, being a public service, is regulated • Services are offered to commercial customers 24 hours a day on weekdays, and 8 hours on Saturdays • Maintenance is done by an outside contractor • Computers are offline 8 hours each work for maintenance • PDS cannot charge PTC more than $82,000 (1994 estimate), as decreed by the Public Services Commission • Intracompany work is billed at $400 an hour (to meet $82,000 limit) • Work done for other companies is billed at $800 • Computer equipment were acquired by lease and purchases, with leases to run for 4 years ...
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...PRESTIGE TELEPHONE COMPANY . Assignment The purpose of this case is to give you an opportunity to exercise your CVP analysis skills in a mixed non-profit/profit service context. As the controller of Prestige Telephone Company, you have been asked for an analyses of the 1997 first-quarter operating results for Prestige Data Services (a fully-owned subsidiary) and possible alternative courses of action to improve performance of Prestige Data in the future. Write a memo to Mr. Rowe (President, Prestige Telephone Company) and Ms. Bradley (Manager, Prestige Data Services) summarizing your analysis and recommending a course of action for Prestige Data Services. Mr. Rowe is considering four different course of action to improve the performance of Prestige Data Services. Discuss each of the options and the outcome you would predict from choosing that option. In addition to these four options, also discuss (1) the change in operating income you would expect for Prestige Telephone Company if Prestige Data Services was shut down, and (2) the number of hours Prestige Data Services needs to sell to outsiders to break even (as noted in guidance question #3 below). You will need to make some assumptions to proceed with your estimates --- you must describe and justify those assumptions. You must include well-labeled exhibits that support your assumptions, analyses and conclusion. Finally, suggest changes to the reports provided to Mr. Rowe for decision-making. The following...
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...Prestige Telephone- Case #2 1. I would present an alternative accounting statement to Prestige Data Services by adjusting the net income due to the fixed expenses of rent and custodial services that are provided in the original Prestige Data Services Summary Results of Operations, First Quarter 2003. Although it appears that the company is suffering great losses, it is necessary to remove the fixed, sunk costs in order to get the adjusted net income. These sunk costs are costless to Prestige Telephone Company, and they could not really be making this money any other way. The adjusted net income is described as follows showing that the loss is almost cut in half during March. Therefore, Prestige Data Services is not costing Prestige Telephone Company money because the loss is not as severe as it seems. January February March Net Income (Loss) (41,472) (40,341) (21,438) Fixed Expenses 9,240 9,240 9,240 Adjusted Net Income (32,232) (31,101) (12,198) (800 – VC)* hours – [ FC – 82,000 ] = Breakeven Point 2. 3. A) I. 138*0.7=96.6 96.6*1,000= $96,600 II. Revenue was originally averaging around $110,400 when the price was $800. Therefore, if the price was increased, revenues would be decreased by $13,800 so Prestige Data should keep the price of $800 in order to maximize revenue. B) I. 179.4*600= $107,640 II. By reducing the price to $600, this would also decrease revenue by $2,760 so Prestige should once again leave the price at...
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...Case Study – Prestige Telephone Co. Company Profile Prestige Data Services is a subsidiary of Prestige Telephone Company, a public utility. They are a computer data service company that does data processing for the parent company in order to sell computer services. The company was opened in order to bring in additional revenue in order to offset increases in telephone rate increases. Throughout the three years of being in operation the subsidiary has been unprofitable. Case Question #1 Assuming Prestige Telephone’s demand for services will average 205 hours per week, what level of commercial sales of computer use would be necessary to break even each month? Given this analysis, is the subsidiary really a problem to Prestige? Solution Based on the breakeven analysis the subsidiary is a problem to Prestige. They are currently operating at an average demand of 205 hours per month. They need to operate at 1116.19 hours in order to break even. The additional, unexpected costs incurred along with the difficulty in finding customers have resulted in the subsidiary being unprofitable and unsustainable. Without bringing in additional customers to reach their breakeven point they should move forward with closing the subsidiary. Table 1.1 Month | Jan | Feb | March | High | Low | CM | Total revenue hrs | 329 | 316 | 361 | 361 | 316 | | Power | $1,633 | $1,592 | $1,803 | $1,803 | $1,592 | $4.69 | Operations | $7,896 | $7,584 | $8,664 | $8,664 | $7,584 | $24.00 | ...
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...Prestige Telephone Company case study In 1999, the Government encouraged public utilities to seek new sources of revenues and profits to reduce the need for rate increases to consumers of telephone services. Prestige Telephone Co. (PTC) considered that a centralised data provider service could be a profitable use of excess hours from existing infrastructure. Prestige Data Services (PDS) performed data processing for the telephone company and sold computer services to other companies and organizations. PTC believed that a profitable subsidiary would reduce pressure for telephone rate increases. After a number of years of delivering losses, PDS believes that more time should be given and that a profitable business was possible. The fundamental problem of Prestige Data Services is that they have too many available hours that are not generating revenue. In the first quarter of 2003, they have an average of 176 unused hours per month, based on current charge rates, this represents an opportunity for additional revenue of over $140,000 per month within the existing infrastructure and resourcing structure. Part a - Learning outcomes is the understanding of the following in this case study: • Incremental Cost Analysis – understanding of the change that a company experiences within its balance sheet due to one additional unit of production. • Return on Investment – how much revenue is earned from the investment PTC has made into the data company • Opportunity...
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...Prestige Data Services Cost Volume Profit Analysis The following equation has been used for the purpose of this analysis: (Intra-company sales + commercial sales) = Fixed Cost + Variable Cost/hour * time (in hours) To work out only the contribution of intra-company and commercial computer use, “Other commercial sales” has been removed from the revenue. To counter that, “Materials cost” has been removed from the costs; three month average for these parameters is approximately equal. Fixed Costs = $212939 Rent ($8000), Custodial Services ($1240), Computer Leases ($95000), Maintenance ($5400), Computer Equipment Depreciation ($25500), Office Equipment and Fixtures ($680), Fixed component of Operations (6*$3600 = $21600), System development and maintenance ($12000), Admin ($9000), Sales ($11200), Sales Promotion ($8083), and Corporate Services ($15236). Variable Costs = $29/hour Variable component of Operations ($24 per hour), Power ($5/hour) – calculate from March power cost divided by March computer use, assuming only billable computer use is to be used for this variable cost. Revenue = $82000 + N* $800/hr (where N is number of commercial sales hours) Intra-company sale of $82000 per month at $400/hour translates to 205 intra-company sales hours per month. Hence, for breaking even: $82000 + $800 * N = $212939 + (205 hours + N) * $29 This gives us N = 177.54 hours, and gives us Break even revenue of $142032.68. Thus, to be run as a viable business...
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...Prestige Telephone Company En su análisis del caso, asumir lo siguiente: 1. Los gastos de promoción para los próximos meses están programados para $8,000. 2. Los valores de las cuentas: “Ventas por otros conceptos” y “Gastos de materiales y suministros” se compensarán aproxima Cuestiones 1. Valorar el resultado de las operaciones de Prestige Data Services. ¿Es realmente la subsidiaria un problema para Prestige Telephone Company? Considerar detenidamente las diferencias entre los costes que figuran en los informes y los costes que serían significativos para las decisiones que está considerando Daniel Rowe. 2. Suponiendo que la demanda de Prestige Telephone Company sea de 205 horas/mes, ¿cuál debería ser el volumen de horas vendidas a clientes externos para alcanzar el punto muerto? Supuesto Demanda PTC Tarifa PTC Demanda externos Tarifas externos Costos: Fijo Variale 400 - 28x205 + 76260 Punto equilibrio Ingresos PTC + Ingresos clientes externos 205 400 (205 * (400 - 28)) + (Q * (800 - 28)) - 19 ?? 800 (76,260) + (772Q) - 197,800 = 197,800 28 800xQ + 772Q + 772Q + 772Q Q -28xQ - 197,800 197,800 121,540 = = 3. Calcular el efecto que tendrían en el resultado las distintas opciones sugeridas por Rowe, dadas las siguientes estimaciones de Bradley: a) Aumentar el precio a los clientes externos a 1.000 dólares/hora disminuiría su demanda en un 30%. b) Reducir el precio a los clientes externos a 600 dólares/hora...
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...Prestige Telephone Company Question 1: Appraise the results of operations of Prestige Data Services (PDS). Is the subsidiary really a problem to Prestige Telephone Company (PTC)? Consider carefully the differences between the reported costs and costs relevant for decisions that Daniel Rowe is considering. The current data indicate that the PDS is in operating loss. And going by the presented data, yes, PDS is a problem to PTC at this point of time. And this in spite of many major costs being absorbed by PTC while charging a sum towards corporate services to PDS. However the way data was collected, costs calculated and presented could be different from the actual reality. And moreover the trend in the 3 months is that the commercial sales is going up (marginally though) and losses are reducing. Also it is reported that PDS is operating with un-used capacity (which might be another reason for the projected loss). Though PDS is in loss currently, (a) a re-structuring of the cost accounting methods, (b) more marketing activities to increase sales and thereby using the free capacity available, (c) reducing the staff count by reducing the number of shifts, could see PDS being profitable in the long run. Shutting down vs. restructuring PDS The decision has to be based on the ROI and the opportunity cost. By closing down PDS, the lost (customer) sales are the opportunity cost. But the short term benefits could be from the sale of equipment, savings from resource cost, rental...
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...Lucas B. Tagarda Mgt. Case 1 This case is compelling us students to understand the business, fitness-training and because there is a real problem to discuss. A trusted employee was both stealing cash and, by not recording all sales, diverting some revenues to herself. This case is a good discussion that helps us students think about both the records needed to run the business and the challenges managers face in making sure the information put into the records is recorded accurately like for example the challenges faced in maintaining an effective internal control system. I have some talk with my mother and her friends with some small businesses and they do told me that a common problem faced in many small businesses lack of overlapping controls, or in this case, they somehow call separation of duties. She just trust Kate Hoffman so much that she let her take multiple tasks such as marketing, facility up-keeping, scheduling of appointments and record keeping. Kate was paid a salary plus a commission based on gross revenues just as other instructors. Kate might have thought that she did more work than other instructors and then she have to deserve more commission. And when her expectation was not met, she lacked the motivation to handle multiple tasks and turned to an unethical way like stealing money from unrecorded revenue. If a new manager is hired, Kate can be released from administrative work and concentrate on her instructor job. This...
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...PRESTIGE TELEPHONE COMPANY In deciding whether to continue, discontinue or sell a subsidiary company, we should consider the benefits and disadvantages of each option. We gauge the contribution of a subsidiary not only by looking at its profitability but also the advantage it can give to the parent company particularly in reducing its costs. Having a low profitability or even a net loss does not necessarily mean that the decision of retaining the subsidiary is wrong. Separating the relevant costs from the irrelevant costs helps the parent company determine how the subsidiary can be a factor in its overall operation. We may not know, but continuing could most likely be the best decision. Identifying cost objects and cost drivers are essential in determining the price, profit and breakeven levels of a firm. Differentiating fixed costs from the variable costs is also very important. Subtracting the variable cost from the selling price (or total revenues minus total variable costs) will give us the contribution margin which “contributes” to recovering the fixed costs, and the excess of which will increase the operating income of the company. Cost-Volume-Profit (CVP) analysis is very helpful in making sound business decisions for the short term, as well as for long-range planning, particularly in this case for product features and pricing. For a company to avoid operating losses, like in the case of Prestige Data Services, the managers should be interested in looking...
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