Prestige Telephone Company
Prestige Telephone Company has a subsidiary called Prestige Data Services. They provide data services, data processing and computer services to commercial companies as well as to Prestige Telephone Company. The data services company was supposed to be profitable by March of 2003. They have been unable to do so. It is up to Mr. Rowe to convince Ms. Bradley to allow Prestige Data Services to stay in business. In order to assist with the preparation of this meeting, we have reviewed several scenarios to decide about the future of the subsidiary.
Assessment of Strategies
The subsidiary has failed to show a positive net income for the first quarter of 2003. It has also failed to keep the monthly computer usage billed to the telephone company under the promised $82,000 per month. Granted, February did show fewer revenues, however, it is a shorter month and therefore fewer billable hours available. In light of the continued net losses, we feel that the subsidiary is a problem to the telephone company and they will continue to be so unless significant changes are made.
If we assume that the telephone service demand will continue to average 205 hours per month, the level of commercial sales of computer use necessary to break even each month will need to increase 27.5 hours to 170 hours per month. This will increase the computer use revenue to $136,000. Assuming everything stayed the same as in March, this would allow them to break-even but not profit.
He outlined four possible scenarios that might possibly make the subsidiary an asset to the company. The first scenario was increasing the price to commercial customer from $800 to $1000 per hour. The increased cost would reduce demand by 30%; from 132 average hours to 92.4 hours per month. The monetary effect this would have would drop revenues to $92,400. This creates an elastic demand of 1.2, which is unadvisable.
Ed = .3 / .25...