HBS case – Salem Telephone Company
Opening In 2000 the Public Service Commission (PSC) was informed by the president of Salem Telephone Company (STC) that a profitable computer service subsidiary would reduce pressure for increases to telephone rates. With approval from the Public Service Commission, STC, a regulated public utility, established Salem Data Services (SDS) in 2001, an unregulated public utility to perform data processing for the telephone company and additionally to sell computer services to other companies and organizations in its’ immediate metropolitan region. After three years of operations SDS has yet to finalize a month in positive numbers and the president of STC is faced with the challenge of whether the subsidiary, SDS can be a profitable business. As Peter Flores, president of STC is preparing to meet with Cynthia Wu, manager of SDS, our group will review some common cost behaviors associated with distinguishing different types of costs; whether fixed or variable relevant to activity, construct a contribution margin income statement, review net income relative to reduction and increases to commercial price, and finally based on our financial analysis of SDS, make specific recommendations to the president of STC as to whether it is more or less profitable to keep the subsidiary SDS.
With Incremental analysis we will be able to calculate the differences in revenue and costs between decision alternatives. Determining the actual fixed and variable costs will able our group to calculate the unit costs per commercial revenue hours. 1. When determining which expenses are considered to be fixed or variable for SDS you need to remember that expenses are based on revenue hours. The expenses that are affected by revenue hours will therefore be variable expenses and those that are not will be fixed expenses. The expenses affected by revenue hours are power and wages/salaries of hourly personnel. All remaining expenses are not affected by...
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