Salem Telephone Case

Topics: Variable cost, Costs, Management accounting Pages: 5 (984 words) Published: February 18, 2014
1.) "Revenue hours" represent the key activity that drives costs at Salem Data Services. Which expenses in Exhibit 2 are variable with respect to revenue hours? Which expenses are fixed with respect to revenue hours?

Variable: Wages of hourly personnel, Power

Fixed:Rent, custodial services, computer leases, maintenance, depreciation, salaried staff wages, administration, sales, systems development, sales promotion, corporate services

2.) For each expense that is variable with respect to revenue hours, calculate the cost per revenue hour. a.Wages of hourly personnel
Total wages of hourly personnel/total revenue hours = cost per revenue hour i.January: 7896/329 = $24 per revenue hour
ii.Februrary: 7584/316 = $24 per revenue hour
iii.March: 8664/361 = $24 per revenue hour

b.Power
Cost of power/total revenue hours = cost per revenue hour
i.January: 1546/329 = $4.7 per revenue hour
ii.February: 1485/316 = $4.7 per revenue hour
iii.March: 1697/361 = $4.7 per revenue hour

3.) Create a contribution margin income statement for Salem Data Services. Assume that intracompany usage is 205 hours. Assume commercial usage is at the March level.

Salem Data Services
Contribution Income

TotalPer Unit
Intracompany Sales (205)82000400
Commercial Sales (138)110400800
Variable Expenses (28.7 x 319.6)9844
Contribution Margin182556
Fixed Expenses212939
Net Operating Income-30383

Intercompany Sales = 205 x 400 = 82000
Commercial Sales = 138 x 800 = 110400
Variable Expenses = 28.7 x 343 = 9844
Contribution Margin = 192400 – 9844 = 182556
New Operating Income = 182556 – 212939 = -$30383

4.) Assuming the intracompany demand for service will average 205 hours per month, what level of commerical revenue hours of computer use would be necessary to break even each month? CM Ratio = Contribution Margin/Sales = 182556/192400 = .9488 Break even = Fixed Expenses/CM Ratio = 212939/.9488 = $224429.81

$224429.81 - $82000 = $142429.81
142429.81/800 = 178.04

The number of commercial revenue hours necessary to break even would be 178.

5.) Estimate the effect on income of each of the options Flores has suggested if Wu estimates as follows:

A.Increasing the price to commercial customers to $1,000 per hour would reduce demand by 30%.
JanuaryFebruaryMarch
Sales $ 168,500 $ 166,900 $ 185,800 Total Variable Costs $ 8,383 $ 7,907 $ 9,173 Contribution Margin $ 160,117 $ 158,993 $ 176,627 Total Fixed Costs $ 212,939 $ 212,939 $ 212,939 Net Operating Income $ (52,822) $ (53,946) $ (36,312)

January
Intercompany Sales = 206 x 400 = 82400
Commercial Sales = (123 x .70) x 1000 = 86100
Variable Expenses = 28.7 x 292.1 = 8383
Contribution Margin = 168500 – 8383.27 = 160116.7
New Operating Income = 160116.7 – 212939 = -$52,822

February
Intercompany Sales = 181 x 400 = 82400
Commercial Sales = (135 x .70) x 1000 = 945100
Variable Expenses = 28.7 x 275.5 = 7906.85
Contribution Margin = 166900 - 7907 = 158993
New Operating Income = 158993 – 212939 = -$53,946

March
Intercompany Sales = 223 x 400 = 89200
Commercial Sales = (138 x .70) x 1000 = 96600
Variable Expenses = 28.7 x 319.6 = 9172.52
Contribution Margin = 185800 - 7907 =176627
New Operating Income = 176627 – 212939 = -$36,312

B. Reducing the price of commercial customers to $600 per hour would increase demand by 30%

JanuaryFebruaryMarch
Sales $ 178,340 $ 177,700 $ 196,840 Total Variable Costs $ 10,501 $ 10,232 $ 11,549 Contribution Margin $ 167,839 $ 167,468 $ 185,291 Total Fixed Costs $ 212,939 $ 212,939 $ 212,939 Net Operating Income $ (45,100) $ (45,471) $ (27,648)

January...
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