Salem Data Case Study

SALEM TELEPHONE COMPANY

Professor William J. Bruns, Jr. & Julie Hertenstein

Introduction

Accounting is not always a black or white subject; there are many variables to consider when making a business decision. Looking past the numbers and being able to look at the larger picture will determine whether you will be an average manager or a great manager.

Background

Facing declining profits, Salem Telephone Company (STC) is evaluating the future of its subsidiary, Salem Data Services (SDS). SDS was meant to boost profits for STC, its parent company. STC could not simple raise its rates due to regulations set by the Public Services Commission. Unfortunately, the subsidiary, SDS, is not performing to expectations. STC’s president, Peter Flores, needs to decide if he should cut his losses and shut down SDS or keep SDS open. Cynthia Wu, the manager of SDS, believes SDS could be profitable in the near future.

Key Problems

In an effort to not raise the rates for its customers, STC was hoping their subsidiary, SDS, would perform. Unfortunately, that was not the case, the startup proved not to be the simple solution as planned. STC had one of its worst years; however, there was a light at the end of the tunnel as there were slight improvements with the startup, SDS. Peter Flores needs to decide whether to cut his losses or allow the STC more time to show profits. On the flip side, by cutting his losses and eliminating SDS, Flores would have to figure out another way to bring in money and not raise rates for his customers. Flores is risking the chance of walking away from an investment that the company had invested years into, which might to be worthwhile in the end and having to purchase these services elsewhere, which might not be good for business, cost wise, in the long run.

Potential Solutions

1. Keep Salem Data Services open and increase the price of services.

(Solution 4a)

2. Keep Salem Data Services open and lower the...