Prestige Telephone Company

Topics: Cost, Costs, Contribution margin Pages: 3 (967 words) Published: April 25, 2012
Prestige Telephone Company

I. Case Background
Prestige Data Services (PDS), a subsidiary of Prestige Telephone Company (PTC), has been experiencing bottom line losses for the two years it has been operating since 1995. The subsidiary has been performing all the data processing for the telephone company and selling computer services to other companies and organizations. Susan Bradley, the subsidiary manager was preparing for a meeting with Daniel Rowe, president of Prestige Telephone Company regarding the losses. Bradley felt only more time was needed but Rowe felt action was necessary to reduce the drain on company resources. The subsidiary was originally established as a mechanism by which high and nonregulated returns could be used to boost the profits as well as to provide the computer services. Since the Public Service Commission had encouraged public utilities to seek new sources of revenue as a step toward deregulation and to reduce the need for rate increases which higher costs would bring, the PDS had begun selling computer time not needed by the parent company to other businesses. However, Public Service Commision restricted that the average monthly charge for service by the subsidiary to the parent not exceed $82,000, which was the estimated cost of equivalent services used by the parent company in 1994. By the end of 1996, income of Prestige Telephone Company was low enough giving the lowest return on investment. Rowe felt it was time to reassess Prestige Data Services. Bradley on the other hand asked for more time as she felt the subsidiary would be profitable by the end of the first quarter of 1997. But when the quarterly reports came, the three months ended March 1997 all reported a loss. Rowe resolved to study the subsidiary’s operations and assess its performance first before deciding whether PDS be closed down or sold.

II. Problem Statement
Based on the subsidiary’s current performance and...
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