Report on Salem Telephone

Company
By

Group members:
Roll no:
B.Asheesh kumar
032
V.V.surya teja
168
C.V.Hareesh naidu
186
M.Rohith
070

Introduction:
Peter Flores is the president of Salem Telephone
Company, he made an agreement with the state
Public Service Commission to establish a Salem data
services, a computer data service subsidiary, to
perform data processing for the parent company.
Summary:
Salem Data services is a subsidiary company by Salem
Telephone Company, the main objective of establishing
this subsidiary company is the profits that arrive from this
company are helpful to parent company to reduce the
pressure of increasing the telephone prices. As Salem
Telephone Company is under regulated it doesnt have
the authority to increase the price of Telephone Company,
by Salem Data services is not regulated so they can
achieve the profits by making changes in the company. In
this way it can compete with the other computer service
organization in a dynamic field, the commission accepted
this proposal subject only to the restriction that the
average monthly charges for services provided by Salem
Data services to Salem Telephone Company not exceed
82000$, the selling price for inter company is at 400$ and
for commercial Sales is at 800$ per hour.

Problems faced by Salem data services:

Not able to utilize all the available hours

High Fixed costs
Higher salaries are paid to employees which is fixed
Hard to find customers than expected

Answer 1:
Expenses are divided into fixed and variable Expenses
with respect to revenue hours:
Fixed Costs:
o Rent
o Custodial services
o Computer leases
o Maintenance
o Computer equipment and fixtures
o Salaried staf
o Systems development and maintenance
o Administration
o Sales
o Sales promotion
o Corporate services
Variable Costs:

o Power
o Hourly personal

Answer 2:
Cost per revenue hour for each variable
expense

Power

January

February

March

Costs($)

1546

1485

1697

Total revenue
hours

329

316

361

Cost per
4.7
revenue hour($
per hour)

4.7

4.7

Hourly
personal

February

March

Costs($)

January
7,896

7,584

8,664

Total revenue
hours

329

316

Contribution margin income

statement
usage

intra company

selling price

400

total sales

192400

Variable expenses

9844

Contribution Margin

182556

Fixed expenses

212939

net profit

(30383)

Cost per revenue

hour($ per hour)

24

205

24

361

commercial company
138
800

Answer 3:
Contribution Margin income statement considering
intra-company hours as 205, and commercial hours
of March month

Answer 4: Break-even point for each month

24

Month

January

February

March

Break-even
Hours

177.4

176.19

177.4

Answer 5:
Price to commercial customers increased to
1000$ and decrease in demand by 30%
Answer 5 (A)
revenue hours
inter company

89200

223

commercial

96600

96.6

total

185800

Variable expences

9172.79

contribution margin

176627.21

fixed expences

212939

net profit

-36311.79

Price to commercial customers decreased to

$600 and demand increased by 30%

inter company

89200

revenue
hours
223

commercial

107640

179.4

total

196840

Variable expences

11549.2

contribution margin

185290.8

fixed expences

212939

net profit

-27648.2

Increase in promotion which increased revenue

hours up by 30%
revenue hours
inter company

89200

223

commercial

143520

179.4

total

232720

Variable expenses

11549.2

contribution margin

221170.8

fixed expenses

204856

net profit

16314.8

Hear it shown as profit but it is not actually profit because

the promotion expenses are not included in the expenses,
if promotion expenses are more than 16314 then there is
a loss, else the diference between 16314 and
promotional expenses is actual profit
Answer 6:

Hear the present situation is, Salem Data services is not

actually a problem it might look like problem by seeing
losses, but if we observe we can see that losses are
decreasing month by month, and due to high value assets
the depreciation is very large which is not actually an
expense but included for avoiding the tax
Suggestions:
Selling the remaining hours by giving discounts
Converting some fixed salaries into variable cost
Should observe the profits for some more period
Learning objectives:

How to arrive at break-even point

How to make Contribution margin income statement
How to differentiate fixed cost and variable cost
See the change in profits if sales were increased or decreased