Prestige Telephone
Case Study – Prestige Telephone Co.
Company Profile
Prestige Data Services is a subsidiary of Prestige Telephone Company, a public utility. They are a computer data service company that does data processing for the parent company in order to sell computer services. The company was opened in order to bring in additional revenue in order to offset increases in telephone rate increases. Throughout the three years of being in operation the subsidiary has been unprofitable.
Case Question #1
Assuming Prestige Telephone’s demand for services will average 205 hours per week, what level of commercial sales of computer use would be necessary to break even each month? Given this analysis, is the subsidiary really a problem to Prestige?
Solution
Based on the breakeven analysis the subsidiary is a problem to Prestige. They are currently operating at an average demand of 205 hours per month. They need to operate at 1116.19 hours in order to break even. The additional, unexpected costs incurred along with the difficulty in finding customers have resulted in the subsidiary being unprofitable and unsustainable. Without bringing in additional customers to reach their breakeven point they should move forward with closing the subsidiary.
Table 1.1
Month
Jan
Feb
March
High
Low
CM
Total revenue hrs
329
316
361
361
316
Power
$1,633
$1,592
$1,803
$1,803
$1,592
$4.69
Operations
$7,896
$7,584
$8,664
$8,664
$7,584
$24.00
Materials
$9,031
$8,731
$10,317
$10,317
$8,731
Material per rev hour
$27.45
$27.63
$28.58
$27.89
Variable cost per unit
$56.58
Price per unit
$800
CM
$743.42
CM ratio
0.929281163
Fixed Cost
$212,636.67
Break Even: Fixed Cost÷(CM Ratio*activity level)
1116.187516
Case Question #2
Estimate the effect on income of increasing the price to
Company Profile
Prestige Data Services is a subsidiary of Prestige Telephone Company, a public utility. They are a computer data service company that does data processing for the parent company in order to sell computer services. The company was opened in order to bring in additional revenue in order to offset increases in telephone rate increases. Throughout the three years of being in operation the subsidiary has been unprofitable.
Case Question #1
Assuming Prestige Telephone’s demand for services will average 205 hours per week, what level of commercial sales of computer use would be necessary to break even each month? Given this analysis, is the subsidiary really a problem to Prestige?
Solution
Based on the breakeven analysis the subsidiary is a problem to Prestige. They are currently operating at an average demand of 205 hours per month. They need to operate at 1116.19 hours in order to break even. The additional, unexpected costs incurred along with the difficulty in finding customers have resulted in the subsidiary being unprofitable and unsustainable. Without bringing in additional customers to reach their breakeven point they should move forward with closing the subsidiary.
Table 1.1
Month
Jan
Feb
March
High
Low
CM
Total revenue hrs
329
316
361
361
316
Power
$1,633
$1,592
$1,803
$1,803
$1,592
$4.69
Operations
$7,896
$7,584
$8,664
$8,664
$7,584
$24.00
Materials
$9,031
$8,731
$10,317
$10,317
$8,731
Material per rev hour
$27.45
$27.63
$28.58
$27.89
Variable cost per unit
$56.58
Price per unit
$800
CM
$743.42
CM ratio
0.929281163
Fixed Cost
$212,636.67
Break Even: Fixed Cost÷(CM Ratio*activity level)
1116.187516
Case Question #2
Estimate the effect on income of increasing the price to