Case Study Report 6
Prestige Telephone Company
GROUP 4 :
LECTURER : Dr. Ahmed Razman
HAND IN DATE : 26 March 2014
2.0 Prestige Data Services is a subsidiary of Prestige Telephone Company, designed to perform data processing for the telephone company and selling computer services to other organizations. The subsidiary started operations in 1995 and has yet to experience a profitable month. Worse, its income was low enough to necessitate a report to shareholders by the end of 1996. Although Rowe was discouraged by results to date, he was reluctant to suggest to Bradley that Prestige Data Services be closed down or sold. Additionally, Rowe was unsure that the accounting reports really revealed the contribution the Data Services was making to Prestige Telephone and also the accounting for separate activities may obscure the costs and benefits they provided. Using the exhibits provided (Exhibit 1 and 2), analysis was made to determine whether Prestige Data Services should be shutdown, or to be allowed more time to demonstrate its profitability.
5.0 Question 1: Appraise the results of operations of Prestige Data Services. Is the subsidiary really a problem to Prestige Telephone Company? Consider carefully the differences between reported ciosts and costs relevant for decisions that Daniel Rowe is considering.
6.0 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 makingdecisions. It is also important to look at the opportunity cost of the leases for thecomputer equipment, which had four years left and are noncancelable. The purpose of thecompany was to provide a step towards deregulation and would decrease the need for arate increase. Also if they shut down Data Services they would have to pay an outsidecompany to provide this
References: 173.0 Haider, I. (2004). Prestige Telephone Company – AIM4343 [Online], Available from: http://www.academia.edu/4007644/Prestige-4343-additional_notes_2_ [Accessed on 21 March 2014] 174.0 Putra Business School. (2013). Accounting for Decision Making. McGraw-Hill Education, Singapore, p.427. 175.0