Question #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.
As advised by Bradley, even Prestige Data Services hasnt been
incurring income; it has however been coping up with demands of the
Prestige Telephone Company and rendering increasing hours to
commercial users based on the First Quarter 1997 data.
As for the costs, we can only make decisions based on variable costs
since cannot make final adjustments for the fixed ones. The following
aspects show that keeping the subsidiary will keep benefitting the
primary.
1. Revenue for the Prestige Telephone Company
If Mr. Rowe decides to close down or sell the subsidiary, the
primary wouldnt get any extra revenue (i.e. space costs and
corporate services) that will promote their step toward
deregulation and reduce the need for rate increases.
2. Expense for data providers
Instead of keeping the primarys monthly total expense for data
services up to $82,000 (the amount Prestige Data Services is
charging), they would have paid for $164,000 (i.e. 205 hours *
$800/hour the average time and the commercial rate) that is
200% of the original amount. This can be increased if the
primary would need more than 205 hours. s
It is observed in Exhibit 2 that the revenue is rising; hence, the loss is
decreasing as the quarter ends. If given a chance to lay-off some staff
or wait until the lease has been lifted, it would be an opportunity to see
the full potential of the subsidiary.