Salem Telephone
Salem Telephone Company – Salem Data Services
Dear Mr. Flores,
The objective of our engagement was to analyze Salem Data Services’ (SDS) operations to determine if this is a viable business with potential for growth and future profit or whether the business is likely to remain unprofitable and should be divested.
A review of Salem Data Services’ utilization metrics for the first quarter of 2004 has helped us pinpoint the crux of SDS’s unprofitability over this three month span. Underutilization of SDS’s computer capacity has resulted in a net loss in each month of the first quarter, ranging from a high in January 2004 of $(41,595) to a low of $(23,700). SDS’s average available billing hours for the First Quarter was 555 hours. However, of the 555 average available billing hours, SDS only billed an average of 335 hours, including both intercompany and commercial hours. Furthermore, of the hours utilized, only approximately 40% were a result of commercial business, while 60% was a result of intercompany business, which is billed at half the rate of commercial business ($400/hr. vs. $800/hr.). The average utilization for a services company like SDS should be approximately 80%, while SDS is falling well short of that metric and is only at about 60% utilization.
An additional factor contributing SDS’s unprofitability is the high percentage of fixed costs compared to variable costs. Using March 2004 as an example, SDS’s fixed costs were $212,939 which were 95% of the costs for the month, while SDS’s variable costs, comprised only of power usage and hourly wages, were only 5% of the monthly costs. Again, using March 2004 as an example, SDS’s contribution margin was 95%, which indicates that $0.95 out of every $1 of revenue went toward fixed costs.
Since we are unable to change the SDS’s fixed costs in the short term and also reducing fixed costs would in turn decrease SDS’s billing capacity, the focus of our analysis was centered on SDS’s utilization
Dear Mr. Flores,
The objective of our engagement was to analyze Salem Data Services’ (SDS) operations to determine if this is a viable business with potential for growth and future profit or whether the business is likely to remain unprofitable and should be divested.
A review of Salem Data Services’ utilization metrics for the first quarter of 2004 has helped us pinpoint the crux of SDS’s unprofitability over this three month span. Underutilization of SDS’s computer capacity has resulted in a net loss in each month of the first quarter, ranging from a high in January 2004 of $(41,595) to a low of $(23,700). SDS’s average available billing hours for the First Quarter was 555 hours. However, of the 555 average available billing hours, SDS only billed an average of 335 hours, including both intercompany and commercial hours. Furthermore, of the hours utilized, only approximately 40% were a result of commercial business, while 60% was a result of intercompany business, which is billed at half the rate of commercial business ($400/hr. vs. $800/hr.). The average utilization for a services company like SDS should be approximately 80%, while SDS is falling well short of that metric and is only at about 60% utilization.
An additional factor contributing SDS’s unprofitability is the high percentage of fixed costs compared to variable costs. Using March 2004 as an example, SDS’s fixed costs were $212,939 which were 95% of the costs for the month, while SDS’s variable costs, comprised only of power usage and hourly wages, were only 5% of the monthly costs. Again, using March 2004 as an example, SDS’s contribution margin was 95%, which indicates that $0.95 out of every $1 of revenue went toward fixed costs.
Since we are unable to change the SDS’s fixed costs in the short term and also reducing fixed costs would in turn decrease SDS’s billing capacity, the focus of our analysis was centered on SDS’s utilization