Salem Telephone Case Study

Topics: Variable cost, Contribution margin, Cost Pages: 4 (848 words) Published: August 14, 2010
Salem Telephone Data Corp
Executive Summary
The analysis of the 2004 first quarter reports, which include the Summary of Computer Utilization and Summary Results of Operation, if is clear that the Data Services division needs to be scrutinized to understand why they continue to operate at a loss. The key areas that need to be addressed are: * Current utilization of computer usage hours

* The consistent negative results of the operations
* Determine if some of the fixed costs can be tied to the level of work and converted to variable costs The immediate concern is the portion of expenses that are fixed costs versus variable costs. Variable costs equal $32,640 our analysis begins with careful inspection of the variable and fixed costs of Salem Data Services. It is clear the variable costs averaging $32,640 over the first quarter is not sufficient to overcome the current fixed costs which equal $189,620. The company should review the salaries for the Sales division and create a pay structure that is tied to revenue and sales. Additionally, sales promotion can also be tied to sales or revenue to convert these to variable costs. The second major issue that needs to be addressed is the under utilization of the computer hours available versus computer hours used. The company is currently averaging about 60% utilization of available hours. The Commercial sales are seriously underutilized and needs to be a focus to driving commercial sales. Commercial demand may need to be re-assessed to determine if there is indeed a big enough market to serve and a review of the sales promotion strategy may need to be restructured. Overall, there is the possibility of Salem Data Services becoming a profitable subsidiary of Salem Telephone Company. Shutting down the division is premature and rather the organization needs to re-visit the promotion and sales strategy to focus on increasing commercial sales and maximize the utilization of their computer hours. Furthermore,...
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