Finally, a meeting took place between Salem Telephone President and the manager of Salem Data Services to discuss the future of Salem Data Services (Bruns & Hertenstein, 2005). Case Tasks 1. Determine Variable and Fixed expenses with respect to revenue hours. 2. Calculate the cost per revenue hour using only variable expenses. 3. Create a contribution margin income statement for Salem Data Services. Assume intracompany usage is 205 hours and commercial usage is at March levels. 4.
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Assuming intracompany use is 205 hours, determine the break-even level for commercial revenue hours. 5. Estimate the following effects on income a. Increase the price to commercial customers to $1,000 per hour which would decrease demand 30% b. Decrease the price to commercial customers to $600 per hour which would increase demand 30% c. Increase promotion to increase revenue hours by 30%. Determine how much can be spent on promotion without a loss for Salem Data Services 6. Based on previous analysis, is Salem Data Services a problem for Salem Telephone?
What should be done about Salem Data Services? Determining Fixed and Variable Expenses Variable expenses, with respect to revenue hours, were determined by selecting only those expenses that vary with production hours: Operations: hourly personnel, Power Fixed expenses were determined by selecting those that do not vary with production hours: Rent, Custodial Services, Computer Leases, Maintenance, Depreciation: Computer Equipment and Office Equipment, Operations: salaried staff, Systems Development and Maintenance,
Administration, Sales, Sales Promotion, Corporate Services Cost Per Revenue Hour Cost per revenue hour was determined by dividing the quarterly average of variable expenses by the quarterly average of revenue hours: Average Power Expense for the quarter $ 1,576. 00 Average Hourly Salary for the quarter $ 8,048. 00 Total Variable Expenses $ 9,624. 00 Average Number of Revenue Hours 335. 33 Cost per Revenue Hour (Total Variable costs/number of hours)$ 28. 70
Contribution Margin Income Statement for Salem Data Services A Contribution Margin Income Statement was prepared with the following assumptions: Intracompany use was 205 hours and Commercial use was at March levels (138 hours) Salem Data
Page 2 Salem Case Study Essay
Services Contribution Margin Income Statement Intracompany (205 Revenue hours @ $400/hr)$82,000 Commercial (138 Revenue hours @ $800/hr)$110,400 Total Sales $192,400. 00 Less Variable Costs Total Revenue hours343 Variable Cost per hour X revenue hours$28. 0 $9,844. 10 Contribution Margin for intracompany and commercial $182,555. 90 Contribution Margin Ratio for Intracompany0. 9283 Contribution Margin Ratio for commercial0. 9641 Less Fixed costs Rent$8,000 Custodial services$1,240 Computer leases$95,000 Maintenance$5,400 Computer equipment depreciation$25,500 Office equipment and fixtures depreciation$680 Operations: Salaried Staff$21,600 Systems development & maintenance$12,000 Administration$9,000 Sales$11,200 Sales Promotion quarterly average $7,677 Corporate Services quarterly average$15,340
Furthermore, several options were analyzed to determine if the company could boost profits through price manipulation which proved unprofitable in each case. Although it was determined that with successful sales promotions the company could show a profit, it is not likely a guarantee. Additionally, the profit was a meager $1,851. 05 which if spent on promotions would be unlikely to boost sales a whopping 30%. The main issue with Salem Data Services seems to be its extremely high fixed costs. Unless the company can eliminate or greatly reduce these expenses, it is doubtful that they will ever be a profitable entity.