In order to determine whether or not the subsidiary is indeed “too good to give up,” two scenario were calculated as follows to demonstrate the financial impact to the Prestige Telephone:
To keep Prestige Data Service in operation, Prestige Telephone will incurre: Expense Lost of Subdiary Revenue Earned Space Corporate Service Total Expense $ 82,000 21,438 9,240 15,236 78,962 Service fee paid to Prestige Data Service Net Loss in March Fee paid by Prestige Data Service
To close down Prestige Data Service, Prestige Telephone will incurre: Expense Sunk Cost Total Expense 178,400 4,560,000 $ 4,738,400 Data service fee if purchased from outside firm 4-year nonecancellable computor equipment lease 223*800 95000*12*4
Incresed cost A v.s. B
Retaining Prestige Data Service seems a better idea.
Break-even Formula: Total Fixed Costs/ (Unit Price - Unit Variable Cost) The company demand for service is 205 hours per month. These hours are billed at $400 per hour. This would create revenue of $82,000. This $82,000 can cover part of the fixed costs, as shown in the formula. Total Fixed Cost: Rent $8,000 Custodial $1,240 Computer Leases $95,000 Maintenance $5,400 Computer Equipment $25,500 Office Equipment and Fixtures $680 Systems Development & Maintenance $12,000 Administration $9,000 Sales $11,200 $168,020 Unit Price: Commercial Billing per Hour $800 Unit Variable Cost: January $29,496 $1,633 $9,031 $7,909 $15,424 $63,493 Unit Variable Costs: $63,493/ 329 Hours = $192.99 Operations Power Materials Sales Promotions Corporate