Salem Telephone Company Case Study

Kayla Friedlander

Salem Telephone Company Case Study

1/29/13

1. With respect to revenue hours, there are only two expenses that are variable: power and wages for hourly personnel. Space costs, equipment costs (excluding power) and salaries (excluding hourly personnel) are all fixed. In addition, sales promotion and corporate services are fixed expenses although the company has decided to spend a different amount every month for these expenses.

2. The variable cost for power is $4.7 per revenue hour and the variable cost for hourly personnel is $24 per revenue hour. Calculations can be found in Appendix A.

3. Contribution Margin Income Statement

Intracompany sales: $82000

Commerical sales: $110400

Total sales: $192400

Variable costs: ($9844.1)

Contribution margin: $182555.9

Fixed costs: ($212939)

Net loss: ($30383.1)

Calculations can be found in Appendix B

4. In order to break even, Salem Data Services must use 177.39 or, rounded up to the nearest hour, 178 commercial revenue hours. Calculations can be found in Appendix C.

5. Increasing the price to commercial customers to $1000 an hour and reducing demand by 30% would lead to an increase in net loss by $12611.82. Decreasing the price to commercial customers to $600 an hour and increasing demand by 30% would lead to an increase in net loss by $3948.18. If revenue hours increased by 30% without a change in price, Salem Data Services would see a positive net income of $1548.72, which they would be able to allocate towards increased promotion. Anything more than this amount, however, would lead to a net loss.

6. Based on my analysis, it would seem as if Salem Data Services is a problem to the Salem Telephone Company due to its negative net income. However, based on its income statements, they have been increasing their revenues each month, which shows that there is room for improvement and growth. The main issue that Salem Data Services faces is that their fixed costs are entirely too...