Essays24.com - Term Papers and Free Essays
Search

Salem Telephone Company Case

Essay by   •  October 19, 2017  •  Case Study  •  1,011 Words (5 Pages)  •  1,787 Views

Essay Preview: Salem Telephone Company Case

Report this essay
Page 1 of 5

Salem Telephone Company

        Salem Telephone Company decided to start a computer data service subsidiary to perform data processing for telephone companies and sell computer service to other companies. However in 2003 this subsidiary’s performance was poor and the return on investment was the lowest according to all years’ financial report. The president wanted to reassess this subsidiary and provided its quarterly report for consideration.

        According to the given Exhibit 2, all expenses can be put into two categories: variable expense and fixed expense. The variable expense includes the power and the wage for personnel. The rest all expenses are included in the fixed expense. The following Exhibit A shows the detail for these two expense categories.

[pic 1]        The sales promotion and corporate services in the Fixed Expense category are two expenses whose numbers are different in each month. But as these expenses are not influenced by how much unit sold, we consider them to be fixed expenses.

        After having the variable expenses and the total revenue hours, we can calculate the variable cost per revenue hour. The Exhibit B shows the variable cost per revenue hour for the power and wage for personnel.

[pic 2]

        The ratio got from Exhibit B will be used to calculate the total variable for each month.

        According to the president’s requirement, we generate the contribution margin income statement for March. The following Exhibit C shows the number details.

[pic 3]        

Because the intracompany’s hour is 205 instead, its sales is calculated as 205*$400=$82,000. And the total variable cost will be changed to 9844.385 which is calculated as $28.7*(205+138).

        By looking at this income statement, we find that it has a negative net income. If the subsidiary wants to break even and have the intracompany sale remains 205 hours, the commercial sale would need to be 177.39 hours. The calculation is shown as followed:

        212,939= ($400-$28.7)*205= ($800-$28.7)*X

                        136,822.5=771.3X

                                X=177. 39

        But the commercial sale in March is 138 hours which is much lower than the break even needs. The manager comes up with three assuming options and wants to see which one of the three can be profitable.

        The following Exhibit D shows the contribution margin and total income for these three options.

Exhibit D

Current situation

Option 1

Option 2

Option 3

Total Revenue

192,400

178,600

189,640

225,520

Total Variable Expense

9,844

8,656

11,033

11,033

Contribution Margin

182,556

169,944

178,607

214,487

Total Fixed Expense

212,939

212,939

212,939

212,939

Net Income

-30,383

-42,995

-34,332

1,548

        The first option requires an increase of commercial sale price from $800 to $1000. Meanwhile the total commercial hour sold will be decreased by 30%. This will change the total revenue into $400*205+ $1000*138* (1-30%) = $178,600

        However, its total income is $12,612 lower than the current income. This means option 1 is less profitable and should not be considered.

...

...

Download as:   txt (5.3 Kb)   pdf (227.6 Kb)   docx (74.1 Kb)  
Continue for 4 more pages »
Only available on Essays24.com
Citation Generator

(2017, 10). Salem Telephone Company Case. Essays24.com. Retrieved 10, 2017, from https://www.essays24.com/essay/Salem-Telephone-Company-Case/79607.html

"Salem Telephone Company Case" Essays24.com. 10 2017. 2017. 10 2017 <https://www.essays24.com/essay/Salem-Telephone-Company-Case/79607.html>.

"Salem Telephone Company Case." Essays24.com. Essays24.com, 10 2017. Web. 10 2017. <https://www.essays24.com/essay/Salem-Telephone-Company-Case/79607.html>.

"Salem Telephone Company Case." Essays24.com. 10, 2017. Accessed 10, 2017. https://www.essays24.com/essay/Salem-Telephone-Company-Case/79607.html.