Salem telephone case
1. ”Revenue hours” represent the key activity that drives costs at Salem Data Service . Which expenses in Exhibit 2 are variable with respect to revenue hours? Which expenses are fixed with respect to revenue hours? A : Variable costs : The power, hourly personal.
Fixed costs : The rent, custodial service, computer leases, maintenance, computer equipment, office equipment and fixtures, salaried staff, system development and maintenance, administration, sales promotion, Corporate service.
2. For each expense that is variable with respect to revenue hours, calculate the cost per revenue hour. A :
Total revenue hours
Variable cost per revenue hour
3. Create a contribution margin income statement for Salem Data Service. Assume that intracompany usage is 205 hours. Assume commercial usage at the March level. A : From the text, we know that intracompany work was billed at $400 per hour, and the commercial sales was billed $800 per hour. The intracompany contribution margin = price - variable cost = $400 - $28.7 = $371.3/hr The commercial contribution margin = $800 - $28.7= $771.3/hr The intracompany usage is 205 hours, and the commercial usage in March is 138 hours. So the sales revenue = $400 * 205 + $800 * 138 = $192,400
Variable costs = $28.7 * (205 + 138) = $9,844.1
The contribution margin = revenue - variable cost = $182,555.9 The fixed costs in March = total expenses - variable costs = $223,300 - 1,697 - 8,664 = $212,939 Net income ($30,383.1)
4. Assuming the intracompany demand for service will average 205 hours per month, what level of commercial revenue hours of computer use would be necessary to break even each month. Since the intracompany demand is known to be 205 hours, the contribution from these sales is assured to cover a portion of the fixed costs. Thus, to determine the level of commercial revenue hours required to break even, the contribution from commercial sales only needs to cover the fixed costs remaining after subtracting the fixed costs already covered by the contribution from intracompany sales. A : The intracompany contribution margin = price - variable cost = $400 - $28.7 = $371.3/hr Fixed costs covered by the contribution from intracompany sales = $371.3 * 205 = $76,116.5 The fixed costs in January = total expenses - variable costs = $212,953 - $1546 - $7896 = $212,953 Fixed costs remaining = $136,868.5
The commercial contribution margin = $800 - $28.7= $771.3/hr Commercial revenue hours = 177.41 = 178 hours (January)
The fixed costs in February = total expenses - variable costs = $ 221,087 - $7584 - $1485 = $ 212,018 Fixed costs remaining = $135,901.5
The commercial contribution margin = $800 - $28.7= $771.3/hr Commercial revenue hours = 176.18 = 177 hours (February)
The fixed costs in March = total expenses - variable costs = $223,300 - $1,697 - $8,664 = $212,939 Fixed costs remaining = $136,822.5
The commercial contribution margin = $800 - $28.7= $771.3/hr Commercial revenue hours = 177.39 = 178 hours (March)
5. Estimate the effect on income of each of the options Flores has suggested if Wu estimates as follows: 1 Increasing the price to commercial costumers to $ 1,000 per hour would reduce demand by 30%. 2 Reducing the price to commercial customers to $ 600 per hour would increase demand by 30% 3 Increased promotion would increase revenue hours by up to 30%. Wu is unsure how much promotion this would taken.(How much could be spent for promotion and still leave Salem Data Services with no reported loss each month if commercial hours were increase 30%?) A : Taking March as an example.
Option 1 :
Intracompany revenue hours
Commercial revenue hours
Intracompany price per hour
Commercial price per hour
Variable cost per unit
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