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 all these costs are compared this will give a clear indication of the more profitable option and this will give good guidance in decision making
Assuming the company demand for service will average 205 hours per month, what level of commercial sales of computer use would be necessary to break even each month? Firstly, let’s have a look at the reports which Rowe received from the Prestige Data Services to do the Cost -Volume – Profit analysis. The cost or expenses listed in the Exhibit 2 consists of both fixed and variable cost. Some cost includes a fixed cost and a variable cost which needs to be broken down. As stated in the information of the company, operating salaries include a fixed amount to pay the six people as well as hourly amounts paid for those who support computer’s operation. The former will be the fixed cost and the last will be variable cost since it varies according to the output which is the operation hour. To calculate these amounts, let’s have a look at Exhibit 1 and 2. In January, total operating wages is $ 29,496, which consists of a fixed amount and the hourly paid portion based on 329 revenue hours when the computer was in operation. In February, the fixed amount is unchanged, but the revenue hours varies to 316, leading to the operating salaries to be $ 29,184. The difference in operating salaries is caused by the difference in operating hour. So we can get the amount paid per hour for operating:
Comparing between Feburary and March, doing the same calculation as above we also get the same variable cost of operating salaries, that is $24/hour. Calculate the fixed amount of operating wages which will be the fixed cost: $29496 - $24 * 329 hours = $21600
Let’s use the information and reports in March 2003 as the latest for the anaylysis We will assume that sale promotion and materials are fixed costs, because with the same number of equipment so it can be considered unchanged. So in this case, only power and hourly paid operating wages are variable costs, all others are fixed costs. We also can assume that the power is mostly spent in revenue hour for operating computer. So we can calculate the power cost per hour:
and we consider it $5 per hour for power cost.
The total relevant monthly fixed costs of the company is:
9240 + 95000 + 5400 + 25500 + 680 + 21600 + 12000 + 9000 + 11200 + 10317 + 8083 + 15236 = 223,256 We can easily get the variable costs per hour:
$24 + $5 = $29
Finally, we have the equation...
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