Salem Telephone Company Case

Group 6 – Salem Telephone Company – Case Study

Summary

In 2001 Salem Telephone established a subsidiary, Salem Data Services, for the purpose of performing data processing services for the telephone company and to meet this need for other companies. By 2003 Salem Data Service had finally overcome the problems experienced during startup and was running smoothly but their reporting had yet to show a profitable month.

Peter Flores, president of Salem Telephone Company was discouraged by the presented results to date; however he was reluctant to suggest to Cynthia Wu, manager of Salem Data Services, that Salem Data be closed down or sold. He thought that the opportunity to have this subsidiary seemed too good to give up easily. Flores questioned whether the accounting reports truly painted a clear picture of the contribution that Salem Data Services was making to Salem Telephone. In other situations he had reviewed in the past, he felt that the procedure used in accounting for separate activities in the company tended to obscure the costs and benefits they provided.

A review of the financial data shows Salem Data with an average monthly operating loss of almost approximately $35,000 in the first quarter. However, if Flores factors in the $82,000 savings Salem Telephone received in March as a result of the $400/hour discount on data services as well as the $8,000 Salem Telephone received in rent from Salem Data, the company still proves itself to be a valuable commodity. If Salem Telephone had received its data services from an outside company at the commercial rate of $800/hour their cost would have been $164,000 for March.

We propose that Salem Data Services can also recognize more profit by turning some of their fixed costs into variable costs. One way for them to do that is to convert some of their salaried employees to an incentive compensation pay structure. For example, by changing the sales team over to a pay structure that has a lower base salary...