Salem Telephone Company Case Study

Topics: Variable cost, Costs, Fixed cost Pages: 7 (776 words) Published: October 19, 2014


Case Study #1. Salem Telephone Company

1. Variable expenses:
Power (the more hours sold, the more energy consumed)
The hourly personnel (operations) works only when the computers are in operation

Fixed expenses:
The rent has to be paid despite any level of production ($8,000 monthly) The custodial services depend on Salem Telephone's estimated space, they are independent from the revenue of the Company The computer leases were acquired to run the business (before it was actually started up) The maintenance is necessary even when you do not produce/sell anything The deprecation depends on the number of years not on the number of hours sold Operations: salaried stuff consists of the six people necessary to run the center (the number of people remains the same) Systems development and maintenance the system needs to be developed and maintained constantly to keep the work in process Administration: the salaries are paid on a fixed regular basis Sales promotion: there is a certain amount of money that has been allocated on advertising Corporate services are independent from revenue (are obtained when needed) Sales (should equal an estimated amount)

2.

January
March
February
Power
1,576
4,485
1,697
Hourly personnel
7.896
7,584
8,664
Total Rev. hours
329
316
361
VC/Revenue hour (Power)
4.7
4.7
4.7
VC/ Revenue hour (personnel)
24
24
24
Total Variable Cost/ hour
28.7
28.7
28.7

Variable cost per revenue hour remains the same although the activity (the number of revenue hours) varies.

3. Variable cost per unit
Power         $ 4.70 Operations: hourly personnel        $ 24
Revenues         $ 192,400 Intracompany sales ($ 400 x 205) $ 82,000
Commercial sales ($ 800 x 138)   $ 110,400
Variable Cost         ($ 9,844.1) Power ($ 4,7 x 343)         ($ 1,612.10) Operations: hourly personnel ($ 8,232)
($ 24 x 343)    
CONTRIBUTION MARGIN      $ 182,555.90        
Fixed Costs        
Rent         ($ 8,000)
Custodial Services        ($ 1,240)
Computer leases         ($ 95,000)
Maintenance         ($ 5,400)
Depreciation Computer equipment         ($ 25,500) Depreciation office equipment and fixtures       ($ 680) Operations: salaried stuff         ($ 21,600) Systems development and maintenance         ($ 12,000) Administration         ($ 9,000) Sales         ($ 11,200) Sales promotion         ($ 8,083) Corporate services             ($ 15,236) ($ 212,939)      Net Loss         ($ 30,383.1)

4. The extent to which the intracompany sales cover of the fixed costs: Sale revenue per Unit $ 400
Variable cost per Unit $ 28.70

Intracompany sales ($400 x 205) $ 82,000.00 Variable costs ($28.70 x 205) ($ 5,883.50) Contribution margin $ 76,116.50 Total fixed cost               $ 212,939.00 Fixed cost covered by intracompany sales               ($ 76,116.50)  Fixed cost remaining     $ 136,822.5

To reach break-even the amount of $ 136,822.50 of fixed cost needs to be covered.

Revenue = Variable Costs + Fixed Costs
205($400) + X (800) =(X+205) ($28.7) +$212,939
82,000 + 800X = 28.7X + 5,883.5 + 212,939
771.3X = 136,882.5
X = 177.3921
177.39 commercial hours need to be sold to break-even

5. Option 1:
Net Loss = ($23,700)
Intracompany...
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