prestige telephone company
Summary
Prestige Data Services is a subsidiary of Prestige Telephone Company, designed to perform data processing for the telephone company and also to sell computer services to other companies and organizations. The subsidiary started operations in 1995 and has yet to experience a profitable month and by the end of 1996 its income was low enough to necessitate a report to shareholders. Mrs. Bradley thinks the company just needs more time while Mr. Rowe feels it is time to reassess Prestige Data Services. Mr. Rowe believes it is possible the accounting reports do not reveal the contribution the Data Service has provided and also the accounting for separate activities may obscure the costs and benefits provided. Therefore we have used the exhibits provided to analyze and come to a conclusion whether Prestige Data services should be shut down or allowed more time to show its contribution.
Analysis
1) The first thing we noticed is that fixed and variable costs are included in the report.
However, variable costs are the only costs that should be considered when making decisions. It is also important to look at the opportunity cost of the leases for the computer equipment, which had four years left and are noncancelable. The purpose of the company was to provide a step towards deregulation and would decrease the need for a rate increase. Also if they shut down Data Services they would have to pay an outside company to provide this service to Prestige Telephone Company along with lose the revenue from the commercial sales. In regards to the space that Prestige Data uses, they could potentially rent the out the space to an outside company. There would also be a benefit to laying the personnel off and not having to pay those wages and salaries.
However, we came to the conclusion that Prestige Data Services is more of a benefit than
Rowe initially thought and should be given more time to show its contribution.
2) In order to determine the level of
Prestige Data Services is a subsidiary of Prestige Telephone Company, designed to perform data processing for the telephone company and also to sell computer services to other companies and organizations. The subsidiary started operations in 1995 and has yet to experience a profitable month and by the end of 1996 its income was low enough to necessitate a report to shareholders. Mrs. Bradley thinks the company just needs more time while Mr. Rowe feels it is time to reassess Prestige Data Services. Mr. Rowe believes it is possible the accounting reports do not reveal the contribution the Data Service has provided and also the accounting for separate activities may obscure the costs and benefits provided. Therefore we have used the exhibits provided to analyze and come to a conclusion whether Prestige Data services should be shut down or allowed more time to show its contribution.
Analysis
1) The first thing we noticed is that fixed and variable costs are included in the report.
However, variable costs are the only costs that should be considered when making decisions. It is also important to look at the opportunity cost of the leases for the computer equipment, which had four years left and are noncancelable. The purpose of the company was to provide a step towards deregulation and would decrease the need for a rate increase. Also if they shut down Data Services they would have to pay an outside company to provide this service to Prestige Telephone Company along with lose the revenue from the commercial sales. In regards to the space that Prestige Data uses, they could potentially rent the out the space to an outside company. There would also be a benefit to laying the personnel off and not having to pay those wages and salaries.
However, we came to the conclusion that Prestige Data Services is more of a benefit than
Rowe initially thought and should be given more time to show its contribution.
2) In order to determine the level of