Stc Case Study

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1) Variable expenses in relation to Revenue Hours are Power, Wages of Hourly Personnel, Corporate services, and Sales Promotions.

Variable Expenses| January| February| March|
Power| $1546| $1485| $1697|
Hourly Personnel| $7896| $7584| $8664|
Corporate Services | $15,424| $15,359| $15,236|
Sales Promotions | $7,909| $7,039| $8,083|
TOTAL VC| $32,775| $31,467| $33,680|

FixedExpenses| January| February| March|
Space Costs| $9,240| $9,240| $9,240|
Equipment Costs| $126,580| $126,580| $126,580|
Salaries| $53,800| $53,800| 53,800|
TOTAL FC| $189,620| $189,620| $189,620|

2) Cost per Revenue Hour for Variable Expenses:

Revenue Hours>| January329| February316| March361|
Power| $1546| $1485| $1697|
Cost/Revenue Hr.| $4.70/hr.| $4.70/hr.| $4.70/hr.|
Hourly Personnel| $7896| $7584| $8664|
Cost/Revenue Hr.| $24/hr.| $24/hr.| $24/hr.|
Corporate Services| $15,424| $15,359| $15,236|
Cost/Revenue Hr.| $46.88| $48.60| $42.20|

Sales Promotions| $7,909| $7,039| $8,083|
Cost/Revenue Hr.| $24.04/hr.| $22.28/hr.| $22.39/hr.|

3) Contribution margin income statement for Salem Data Services Assumption: Intra company usage=205 hours; Commercial usage for March=138 hours

Revenue Hours
Intra company: 205
Commercial: 138
Total Revenue Hours: 343

Salem Data Services Income Statement| |
Revenues| |
Intra company sales| $82,000|
Commercial Sales| 110,400|
TOTAL REVENUE| $192,400|
| |
LESS Variable Expenses| |
Power| $1612.10|
Hourly Personnel| 8,232|
Corporate Services| 14,474.60|
Sales Promotions| 7,679.77|
TOTAL VARIABLE COSTS| $31,998.47|
CONTRIBUTION MARGIN| $160,401.53|
| |
LESS FIXED EXPENSES| |
Space costs| |
Rent| $8,000|
Custodial services| 1,240|
Equipment costs| |
Computer leases| 95,000|
Maintenance| 5,400|
Depreciation| |
Computer equipment| 25,500|
Office equipment and fixtures| 680|
Wages and Salaries| |
Operations: Salaried staff| 21,600|
Systems development and maintenance| 12,000|
Administration| 9,000|
Sales| 11,200|
| |
TOTAL FIXED COSTS| $189,620|
| |
NET INCOME (loss)| $(29,218.47)|

4) Assuming the intracompany demand for service will average 205 hours per month, what level of Commercial revenue hours of computer use would be necessary to break even each month?

Break even sales= VC+FC= $31,998.47+$189,620=$221,618.47
Breakeven sales dollars=$221,618.47
$221618.47 - $82000 (intracompany sales)= $139,618.47 (commercial sales) $139,618.47 / $800= 175 commercial hours

5) A) Increasing the price to commercial customers from $800 to $1,000 would reduce demand by 30%

Assuming intracompany hours usage= 205 and recalculating the March Commercial usage= 127 hours [(205*138)/223=127] 205x$400= $ 82,000 + 127x$1000= $127,000 = $209,000

30% reduced demand x $209,000= $146,300 (this is not favorable as this amount is less than breakeven)

B) Reducing the price to commercial customers to $600/hour would increase demand by 30%

205x$400=$82,000 + 127x$600= $158,200

30% increase x $165,400= $205,660 (this is also not favorable as this revenue is less than the breakeven)

C) Increased promotion would increase revenue hours by up to 30%

205x$400 =$82,000 + (127*1.30=165) x $800= $214,000
$214,000 - Less promotional cost= 38 hours X $22.40= $851.20= $213,148 (this is also unfavorable as it does not meet the breakeven point)

The optimal would be
205 x $400=$82,000 + [165 x $1000= $ 165,000]= $247,000
$247,000 - $851.20= $246,148
Increased promotion by 30% with $1000/ hour for commercial usage is most favorable...
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