Salem Case Study

Topics: Variable cost, Costs, Income statement Pages: 4 (1031 words) Published: October 17, 2012
Case Summary
Salem Telephone Company, a regulated utility, received permission from the state Public Service Commission to establish Salem Data Services. Salem Data Services would provide data processing services for the telephone company as well as outside companies. Unlike Salem Telephone, Salem Data Services would not be a regulated utility and would be considered a separate entity. While the intention would be that the profit from Salem Data would ease pressures to raise telephone prices, the company had yet to produce a single profitable month. Finally, a meeting took place between Salem Telephone President and the manager of Salem Data Services to discuss the future of Salem Data Services (Bruns & Hertenstein, 2005). Case Tasks

1. Determine Variable and Fixed expenses with respect to revenue hours. 2. Calculate the cost per revenue hour using only variable expenses. 3. Create a contribution margin income statement for Salem Data Services. Assume intracompany usage is 205 hours and commercial usage is at March levels. 4. Assuming intracompany use is 205 hours, determine the break-even level for commercial revenue hours. 5. Estimate the following effects on income

a. Increase the price to commercial customers to $1,000 per hour which would decrease demand 30%
b. Decrease the price to commercial customers to $600 per hour which would increase demand 30%
c. Increase promotion to increase revenue hours by 30%. Determine how much can be spent on promotion without a loss for Salem Data Services 6. Based on previous analysis, is Salem Data Services a problem for Salem Telephone? What should be done about Salem Data Services? Determining Fixed and Variable Expenses

Variable expenses, with respect to revenue hours, were determined by selecting only those expenses that vary with production hours: Operations: hourly personnel, Power Fixed expenses were determined by selecting those that do not vary with production hours: Rent, Custodial Services, Computer...
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