Salem Telephone Case Study

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Q1:
By definition, variable costs change in total as the level of activity changes, while fixed cost do not change in total with changes in activity level. Therefore, we identify: * Power and Operations: Hourly personnel are variable costs. * Accounts of Sales promotion and of corporate services also changed through three months period, and thus we suspect that they could be variable costs as well. But as case indicates that sales promotion is not determined by current activity level, so we rule out account of sales promotion. Furthermore, case indicates that the amount of corporate service is based on factors such as total wages and salaries, account receivable and number of past-due accounts. So total salary and wage can be a determination of total amount of corporate service, which reinforced our suspicion of account of corporate services being variable cost. However then we conduct an analysis to see whether amount of account of corporate service is correlated with the amount of salaries and wages, they are not significantly correlated with each other. So we also rule out the account of corporate services being variable costs. * Conclusion: we identity that Power and Operations: Hourly personnel are variable costs, and the rest are fixed costs. Q2:

For March 2004, cost data was integrated and presented as following: Salem Data Service company, Variable Costs Data For Q1 2004| Cost Driver| January| February | March|
Power| $ 1,546.00 | $ 1,485.00 | $ 1,697.00 | Operations: hourly personnel| $ 7,896.00 | $ 7,584.00 | $ 8,664.00 | Total Variable Costs| $ 9,442.00 | $ 9,069.00 | $ 10,361.00 | Total Revenue hours| 329| 316| 361|

Variable Costs per hour| $ 28.70 | $ 28.70 | $ 28.70 | | | | |
Salem Data Service Company, Fixed Costs Data for Q1 2004|
Cost Driver| January| February | March|
Space costs| $ 9,240.00 | $ 9,240.00 | $ 9,240.00 | Equipment Costs (excluding Power)| $ 126,580.00 | $ 126,580.00 | $ 126,580.00 | Wage and Salaries (excluding hourly Personnel)| $ 53,800.00 | $ 53,800.00 | $ 53,800.00 | Sales promotion and Corporate Service| $ 23,333.00 | $ 22,398.00 | $ 23,319.00 | Total Fixed Costs| $ 212,953.00 | $ 212,018.00 | $ 212,939.00 |

Therefore, for March 2004, we had:
Salem Data Service Company, Costs Data for March 2004|
| March|
Variable costs| $ 10,361.00 |
Total Fixed costs| $ 212,939.00 |
Total Revenue| 361|
Variable Costs per revenue hour| $ 28.70 |

Q3:
From the case, and Exhibit 1, we had following data:
| Billing rate| Working hours| Revenue|
Intracompany work| 400| 223| $ 89,200.00 |
Commercial work| 800| 138| $ 110,400.00 |
Total| | 361| $ 199,600.00 |

And Contribution Margin Income Statement at March is presented as following: Margin Income Statement for March 2004, SDS company|
Revenue| |
Intracompany| $ 89,200.00 | Commercial| $ 110,400.00 | Total Revenue| $ 199,600.00 | Less: Variable Expenses| |

Power| $ 1,697.00 | Operations: hourly personnel| $ 8,664.00 | Total Variable Expenses| $ 10,361.00 | Contribution Margin| $ 189,239.00 | Less: Fixed Expenses| |

Rent| $ 8,000.00 | Custodial Services| $ 1,240.00 | Computer Leases| $...
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