Salem Telephone Company Case Study

The financial analysis of Salem Data Services’ first quarter shows three growing areas of concern. The major concern is the consistency in negative returns. Although the net income for Salem Data Services is constantly growing, there are two problems that can potentially help increase the profits. First are the remaining hours available to sell each month. This accounts for approximately 38% of the monthly available hours; which means the company is losing out on the potential to make an additional $178,400 in commercial sales ($800x223). Another concern is the high operating leverage indicating the company has a high risk level. To lower the operating leverage, Salem Data Services should consider moving some of the fixed costs to variable costs. This can be done by placing some of the sales personnel, which are salaried employees, to a bonus structured plan. Under this plan, sales associates would be paid a lower base pay with incentives. This method could also help Salem Data Services sell the additional hours and increase company revenue.

1. Variable costs are costs that change in proportion to changes in volume or activity. Fixed costs are costs that do not change in response to changes in activity level.

The expenses that are variable with respect to revenue hours include:

• Equipment Costs: Power - This is a variable cost because the amount the computer is utilized and the energy that is consumed are direct correspondents. For example, when the number of households sold increases, the computer is utilized more and more energy is consumed.

• Wages and Salaries: Operations hourly personnel - This is a variable cost because salaries are based on number of hours worked.

The expenses that are fixed with respect to revenue hours include:

• Space Costs: Rent - This is fixed because the same amount is paid to Salem Telephone Company no matter how many hours are sold. Salem Data Services rented the ground floor for $8,000 per month.

• Space Costs:...