Prestige Telephone Company

Topics: Costs, Variable cost, Fixed cost Pages: 10 (2730 words) Published: November 3, 2010

Prestige Data Service


Executive Summary
To assist Prestige Telephone Company on making the decision of continue its subsidiary or not, this report provides an analysis of Prestige Data Service (the subsidiary) on the status quo revenues and costs, a prediction on its break even situation, as well as possible options to increase profit. The report has its limitations due to insufficient detailed information on both other revenues and variable costs of Prestige Data Service. But under certain consumptions and calculation methods, as applied in the report, we can still figure out the optimal solutions. Revenues, costs and profits are expressed in terms of the company’s output after analyzing the underlying relations behind the data provided in Prestige Data Service’ statements in Excel, which is used to find out the breakeven situation. The concept of contribution margin is applied in the analysis of choosing the best available option. Besides, detailed information and calculations can be found in Appendix. Results of analysis shows that though Prestige Data Service has been experiencing continuous loss ever since it was founded, it is still making progress on reducing the net loss and may be able to break even when their commercial sales reaches a certain amount. Hence, Prestige Telephone Company is recommended to keep the subsidiary for future benefits. In order to generate greater profit in the future, Prestige Data Service should focus more on increasing promotions so that profit can be boost up. In the mean time, reducing commercial hour capacity will not be a suitable method to follow. Additionally, managers are urged to seek ways to reduce costs and improve efficiency in the long run.

Table of Contents
Executive Summary1
1Revenue Analysis3
2Cost Analysis4
2.1Fixed Costs4
2.2Variable Costs4
2.2.1Operation Wages and Salaries4
2.2.2Power Expense4
2.3Total Cost5
3Breakeven Analysis5
4The Profit of Prestige Data Service6
4.1Expression of Total Profit6
4.2Contribution Analysis6
4.3Possible Options6
4.3.1Changing Pc by $2006
4.3.2Boost Sales by Increasing Promotion7
4.3.3Reduce Commercial Hour Capacity7
Conclusion and Recommendation8

Prestige Data Service is a subsidiary of Prestige Telephone Company, which provides computer services to its parent company as well as other organizations. Though it was expected to be profitable in order to reduce pressure for telephone rate increases, Prestige Data Service has been experiencing losses ever since it was founded in 1999. Facing the discouraging result of continuous net loss, Prestige Telephone Company has to decide whether to continue the subsidiary or close down. To provide information needed, the following analysis will focus on two parts: find out the necessary commercial hours to break even each month; estimate the possible effects on total profit of increasing or reducing price to commercial customers, increasing sales by promotions and reducing commercial hour capacity. The data that will be used in this report are based on the income statements and the summary of computer utilization for each of the first three months of year 2003. Outline:

* Define the fixed costs and the variable costs
* Get the breakeven commercial hours and compare with the current amount * Find out the profit function based on revenue and cost
* Analyse the effect on profits by changing the commercial sales price, increasing in demand by adding more promotion, and reducing commercial hours capacity

Revenue Analysis
Prestige Data Service performs data processing for its parent company and sells computer services to commercial customers. Under this condition, the revenue (R) of Prestige Data Service is mainly composed of intercompany sales and commercial sales. However, there is an undefined earning listed as...
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