Re:Salem Telephone Company, Salem Data Services Accounting Analysis
Salem Telephone Company recently established Salem Date Services, a computer service subsidiary of the telephone company. The new subsidiary was established in efforts to earn the company increased revenues in order to relieve pressure to increase rates for the regulated telephone company. Salem Data Services accounting has shown profit loss for the subsidiary over the past three months. Peter Flores, president of Salem Telephone Company, is preparing for a meeting and has decided to examine the accounting analysis for the computer service subsidiary to decide whether the supplementary organization is really contributing to the company’s profits or not.
Beginning the analysis it is first important to examine which costs are the variable cost and which costs is the fixed cost. Power, operations hourly personnel, sales promotion, and corporate services are all variable cost, however; sales promotion and corporate services have a mixed cost element present. Rent, custodial services, computer leases, maintenance, depreciation on both computer equipment and office furniture, operations staff salaries, systems development and maintenance, administration expenses, and sales expenses are all fixed cost. “Revenue hours” are the key activity that drives cost at Salem Data Services. With respect to revenue hours, power and operations hourly personnel are the two variable costs. The cost per revenue hour for power is $4.70, and the cost per revenue hour for operations hourly personnel is $24.00.
Continuing with the analysis a contribution margin income statement has been created to determine the potential profits Salem Data Services could earn assuming the intracompany usage was 205 hours. Examining this income statement, operating income is a net loss of $30,014 (see Exhibit 1). This shows a 5% decrease in revenue hours, as related to intracompany hour’s reduction, will result in a 27%...