Salem Telephone Case

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Turkesa Bullock
BUS 5431 Managerial Accounting
January 31, 2013
Salem Telephone Company Harvard Case Study

Recommendation:

The two suggestions by Flores:

1. Use pricing strategy to increase commercial revenue hours

* This method will not add extra costs. However, according to our estimation above, changing price to either $1000 (97 hours) or $600 (180 hours) cannot prevent a net loss.

2. Increase sales promotion cost to win more business but the price unchanged
* If SDS wants to increase 30% of commercial sales, the extra promotion costs cannot exceed $2012. Considering the promotion cost $8083 on March, additional $2012 is roughly 24.9%. That is, SDS can only increase 25% promotion cost to achieve 30% of growth.

Based on our analysis, SDS has large fixed costs so that it’s not easy to profit. However, SDS still has chances to profit but need great efforts. If SDS does not exist, STC has to purchase 205 intracompany hours from other companies at market price $800, which costs $164000. In the meantime, STC also saves some costs if SDS closed:

Fixed expenses

Rent 8,000

Maintenance 5,400

Power 1,697

Salaried staff 21,600

Hourly personnel 8,664

System development 12,000

Administration 9,000

Sales 11,200

Sales promotion 8,083

Total saved expenses 85,644

Outsourcing costs 164,000

Extra cost if close SDS -78,356

STC can only save $85644 by closing SDS, but it needs to spend $164000 to purchase service from outside. In other words, STC needs to pay extra $78356 if SDS does not exist. Therefore STC should keep SDS business.

Since SDS is essential to keep, the first priority of SDS’ goal is to break even, at least. We recommend Cynthia Wu to combine both Flores’ suggestions. That is, both increase the promotion budget and also reduce price, which will make SDS become profitable more easily
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