Prestige Telephone Company Scott Johnson, Nicole Phillips, Ashton Shuler, & Brandy Watts February 25th, 2014 Group Contributions Responded to all texts, discussion boards, and emails Participated in online chat and conference call Answered question 3 Provided the framework of how the case would be set up Suggested new ideas for later projects on how to discuss our topic Responded to all texts, discussion boards, and emails Participated in online chat and conference call Answered question 2
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Set up a conference call, but we could not all attend, so we decided on a later time Came up with the idea we all should write a short conclusion for each question to make it easier to write a bigger one at the end of the case Responded to all texts, discussion boards, and emails Participated in online chat and conference call Answered question 4 Formatted the case into the format needed Set up the FaceBook message we used to check in with each other and share ideas Responded to all texts, discussion boards, and emails
Participated in online chat and conference call Answered question 1 Set up a conference call where we confirmed what question each person would answer Made sure everyone was up to speed on what the individual expectations of the group would be QUESTIONS 1. ) Appraise the results of operations of Prestige Data Services. Is the subsidiary really a problem to Prestige Telephone Company? Consider carefully the differences between reported costs and costs relevant for decisions that Daniel Rowe is considering.
In deciding whether Prestige Data Services is a problem to Prestige Telephone Company, we must look at the benefits and costs that are associated with both the company as a whole and as separate functioning parts. While the subsidiary looks to show a loss while standing on its own, it was initially created to provide services to the parent company. The benefits that it provides to the parent company allow them to operate at a lower cost of service.
When we look at the shared costs that the data company and the telephone company have (accounting, payroll, etc) we have to remember that if the data company was not there, the costs of the shared services would be completely associated to the telephone company. Also, the services that the data company provides are at a much lower cost to the telephone company. It is hard to look at the activities in the two companies separately because they are dependent upon one another for services and that is why the subsidiary was created initially.
Prestige Data Services allows Prestige Telephone Services to reduce their costs in two ways – shared expenses and reduced supply chain costs. From this point of view, the subsidiary is not a problem for the parent company; it is a benefit to them. 2. ) Assuming the company demand for service will average 205 hours per month, what level of commercial sales of computer use would be necessary to break even each month? In order to determine the level of commercial sales of computer use needed to break even each month, we had to start by determining and separating the companies fixed and variable costs in order to apply the break even calculation:
Contribution margin :( 800-4. 53-80. 13) = $715. 34 Since the Prestige Telephone Company has an agreement with the Prestige Service Commission (PSC) to cover $82,000 of the total costs, we had to consider their contribution when calculating the breakeven point: (total FC) – [(PSC contribution) – (average monthly hours of demand*VC / unit)] / Contribution Margin FC = (9240+95000+5400+25500+680+12000+9000+11200+7677+15340) = 191,037 191,037–[(82,000–(205*84. 66)] = 176. 69 hour By taking the 176.
69 hours times the $800 per hour for commercial sales would = $141,532 in sales needed each month in order for the company to break even. 3. ) Estimate the effect on income of each of the options Rowe has suggested if Bradley estimates as follows: a. Increasing the price to commercial customers to $1,000 per hour would reduce demand by 30%. In March 2003, demand was for 138 hours, and a 30% reduction would put demand at 97 hours (138 hours x . 70 = 96. 6 hours). $5 Variable Op. wages + $25 Fixed Op. Wages = $30 (Power) Demand x Contribution per hour = Contribution
97 hours x ($1,000 - $30) = $94,090 Compared to present 138 hours x ($800 - $30) = $106,260 The monthly contribution to fixed costs and income at $800 is greater by $12,170 than the contribution expected at $1,000. Therefore, income will be greater if we retain the $800/hour price to commercial customers. b. Reducing the price to commercial customers to $600 per hour would increase demand by 30%. In March 2003, demand was 138 hours for commercial customers, so a 30% increase would put demand at: 179 hours (138 hours x 1. 30 = 179. 4 hours).
179 hours x ($600 - $30) = $102,030 Compared to present contribution of $106,260, a price reduction would reduce income by $4,230 per month. c. Increased promotion would increase sales by up to 30%. Bradley is unsure how much promotion this would take. (How much could be spend and still leave Prestige Data Services with no reported loss each month if commercial hours were increased 30%? ) This increase would also move the hours up to 179 hours per month. At $800 per hour, the total contribution would be: 179 hours x ($800 - $30) = $137,830
An amount up to the difference between this new contribution and the present contribution of $106,260 or $31,570 could be spent without reducing income. d. Reducing operations to 16 hours on weekdays and eight hours on Saturdays would result in a loss of 20 of commercial revenue hours. Reducing hours would reduce demand for commercial revenue hours by 20%, from 138 hours to 110 hours. At that level, the total contribution would be: 110 hours x ($800 - $30) = $84,700 or $21,560 less than current costs. A loss of $21,560 would not offset the savings of variable costs each month. 4. ) Can you suggest changes in the accounting and reporting system now used for operations of Prestige Data Services which would result in more useful information for Rowe and Bradley? Clearly seen in the case, Prestige Data Services has chosen to use the absorption costing method. The variable costs and the fixed costs are all mixed in through the different categories of costs. When you use absorption costing, you do not get the true value of your expenses when it comes to an internal point of view. The operations and power costs need to be set apart from the rest of the costs.
As of right now, there is an excess of power and operations costs that are not being used. This excess of expenses takes away from the revenues, but really nothing is being used. The best option for Prestige Data Services is to switch to a simple allocation based costing model. By switching to the ABC method, Prestige Data services will be able to allocate the variable costs accordingly. They will not be reporting costs that are not even being used. The switch will also help set a proper price to clients and to their parent company Prestige Telephone Company.