1.) Variable and Fixed Costs
The variable costs that Salem Data Services incurs with respect to revenue hours are power usage and hourly personnel wages. Power usage is a variable cost because the monthly power expense changes as a result of how much of the computer service is used. The hourly personnel wages are a variable cost as well because hourly workers are required to work when the computer service is operational. The revenue hours change each month and this causes the hourly workers salary to change too. The fixed costs, with respect to revenue hours, are rent and custodial services for the space that is leased by Salem Data Services as well as the computer leases, maintenance, depreciation of the computer equipment and the depreciation of the office equipment and fixtures. Other fixed costs include the salaried staff in charge of operations, the salaried staff that are in charge of the systems development and maintenance, the administration staff and the sales staff, which are also salaried. These are all fixed costs because they stay the same each month and are not affected by the change in revenue hours each month. The last two fixed costs are sales promotion and corporate services. Sales promotion is considered a fixed cost because the expense is not related to the current level of work. This cost was determined by the managers’ estimation of how much they needed to spend in order to acquire new clients. Corporate services are also considered a fixed cost because they not related to the level of work or monthly revenue hours that are generated. Exhibit 1A on the attached worksheet shows the variable and fixed cost breakdown for each month.
2.) Cost Per Revenue Hour
For the power variable cost, the cost per revenue hour is found by taking the power expense for each month and dividing it by the total revenue hours for each month. For January, the power expense is $1,546 and the total revenue hours are 329. The cost per revenue hour is $4.70 ($1,546/329). For February, the power expense is $1,485 and the total revenue hours are 316. The cost per revenue is $4.70 as well ($1,485/316). For March, the power expense is $1,697 and the total revenue hours are 361. Cost per revenue is again $4.70 ($1,697/361). For the hourly personnel, the steps taken above are used to compute the cost per revenue. For January, the hourly personnel wages are $7,896 and the total revenue hours are 329. The cost per revenue hour is $24 ($7,896/329). In February, the hourly personnel wages are $7,584 and total revenue hours are 316. The cost per revenue hour is again $24 ($7,584/316). Finally in March, the hourly personnel wages are $8,664 and the total revenue hours are 361. The cost per revenue hour comes out to be $24 ($8,664/361). The total cost per revenue hour for each is $28.70 and this is computed by adding the cost per revenue hour for the power expense and the hourly personnel together. These calculations can be found in Exhibit 2A on the attached worksheet.
3.) Contribution Margin Income Statement
Exhibit 3A on the attached worksheet shows the contribution margin income statement for Salem Data Services when Salem Telephone usage is 205 hours and the commercial usage is at the March level of 138 hours. The total sales are $192,400 of which $82,000 belongs to sales made from Salem Telephone at a $400 sales price and $110,400 of this belongs to commercial usage at a sales price of $800. The total variable costs are $9,844.10. This was found by taking the total cost per revenue hour of $28.70 and multiplying it by the total revenue hours, which were 343 (205+138). The contribution margin is $182,555.90. This was determined by taking the total sales of $192,400 and subtracting out the variable costs of $9,844.10. To get the net income, the total fixed costs of $212,939 are subtracted from the contribution margin, which produces a loss...