Prestige Telephone Company

Topics: Variable cost, Costs, Total cost Pages: 13 (2175 words) Published: January 18, 2009

Point of View: Management Consultant

I. Issues and Concerns:

■ In 1999, the Public Service Commission encouraged all public utilities to: 1. seek new sources of revenues and profits since heading towards deregulation; and 2. To reduce the need for rate increases.

■ Prestige Telephone Co. realized that a centralized service that could plan, control, and account for its own operations could benefit themselves and other businesses in the region.

■ Utilize the current telephone circuits and sell extra computer time not needed by the telephone company.

■ Prestige Data Services performed data processing for the telephone company and sold computer services to other companies and organizations.

■ Daniel Rowe, President of Prestige Telephone believed that a profitable subsidiary would reduce pressure for telephone rate increases.

■ Susan Bradley, Manager of Prestige Data Services believed that given more time, the subsidiary is yet to experience profit, but Daniel Rowe felt action was necessary to reduce the drain in company resources.

II. Statement of the Problem:

1. The summary results of Operations of Prestige Data Services for the first quarter of 1997 revealed a net loss which opted top management to appraise what alternative courses of action should be undertaken to improve the performance of the subsidiary and prevent its closure.

V. Objectives

1. To analyze the results of operations as they have been reported, and to understand the origin and nature of receipts, revenues, expenditures and expenses.

2. To develop an understanding of the economics of a business and to use that understanding to forecast the potential change in income which would occur if various alternative courses of action were selected by management.

3. To understand the importance of the way in which cost information is reported, and the way in which accounting and reporting systems can be used to highlight the factors which are important to management and for the appraisal of the operations.

III. Areas of Consideration:

Based on the records and informations presented, the following areas are to be considered:

1. The top management of the Prestige Telephone Company is considering alternative courses of action which might be taken to improve the performance of a new subsidiary, Prestige Data Services.

2. It was originally conceived as a mechanism by which high and non-regulated returns could be used to augment the profits of Prestige Telephone Company, while at the same time providing computer services to that company.

3. The subsidiary’s performance has not lived up to expectations. Nevertheless, after two years of operation, Prestige Data Services has succeeded in coming on line with services needed by the parent company and is selling excess hours of capacity to outside customers at an increasing rate.

4. $82,000 was the maximum average monthly service charge by the subsidiary to Prestige Telephone Co.

5. Start-up problems in 2000:
■ Late equipment deliveries
■ Personnel demanded higher salaries
■ Potential customers were hard to find

6. Income of Prestige Telephone had dropped to the lowest return on investment in seven years

7. Reassessment of Prestige Data Services was needed to reduce the drain on the company services

8. The summary of computer utilization (Exhibit 1) of Prestige Data Services;

9. The Summary results of operations of Prestige Data Services (Exhibit 2);

10. Service offered to commercial customers was 24/day on weekends and 8 hours on Saturdays;

11. Routine maintenance of computers was provided by an outside contractor who took the computer off-line for eight hours each week for testing and upkeep.

VI. Definition of Terms...
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