Salem Telephone

TO:  Frank Odlum

FROM:  Carlos Oregon, Jennifer Peuplie, Sandy Nourian, Nena Patterson

DATE: Nov 21, 2010

SUBJECT:  SALEM TELEPHONE COMPANY

RECOMMENDATION: STC should keep SDS’ business, increase promotion budget and reduce price.

CONCLUSION:  Keeping SDS running and utilizing both of Flores’ suggestions will help make SDS more profitable.

Q1. “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 expenses are described as costs which are volume-related; generally, these costs fluctuate with the number of products produced. Specifically concerning our case, Salem Data Services (SDS), we are focusing on revenue hours; costs which correspond with and are driven by activity level at SDS. Variable expenses with respect to revenue hours are power and hourly personnel. Power consumption varies based on the quantity of hours consumed. Hourly personnel costs fluctuate, and are dependent on the amount of time required for staff to perform functions for the hours sold. Furthermore, sales promotion and corporate services are typically classified as variable costs. However we are recognizing variable costs as they correspond with “revenue hours”, thus representing the principle driver of costs at Salem Data Services.

Fixed expenses are defined as time-related costs which do not change in response to changes in activity levels. For SDS fixed costs encompass rent, custodial services, computer leases, maintenance, depreciation, salaried staff, administration, systems development/ maintenance, and sales. A few explanations are as follows: rent is a fixed cost as SDS is required to compensate Salem Telephone regardless of the quantity of hours SDS sells. Custodial services are a fixed cost as these expenses depend on Salem Telephone's estimated annual cost per square foot, apart from the...