Salem Telephone

Company

C.V. Hareesh Naidu

V.Venkata Surya Teja
B. Asheesh Kumar
M. Rohit Kumar

186
168
032
070

Salem Telephone Company

Subsidiary : Salem Data Services
Data processing service provider for the
telephone company.
Sell computer services to other companies.
Initially started to reduce telephone rate hikes.
Currently running in losses
Mr. Flores wished to have a wholly owned entity
rather than a public utility company.
Average monthly charge for services by the
subsidiary to parent should be less than $82,000

Problems
Delayed equipment deliveries.
Higher salary expectation by the
personnel.
Hard to find customers than
expected.
Lowest return on investment in 7
years.

Fixed and Variable Costs

of Salem Data Services
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 personnel

Cost per revenue hour for each

variable expense

Power:
January

February

March

Costs($)

1546

1485

1697

Total revenue
hours

329

316

361

4.7

4.7

Cost per
4.7
revenue hour($
per hour)

Hourly Personnel:

January
Costs($)
Total revenue
hours

February

March

7,896

7,584

8,664

329

316

361

24

24

Cost per
24
revenue hour($
per hour)

Contribution margin

Usage(hours)
Selling price per
hour($)
total sales
Variable expenses

intra
commercial
company
205
400
192400
9844

Contribution Margin

182556

Fixed expenses

212939

net profit

(30383)

138
800

Break-even analysis
Average intra-company hours = 205
Cost of intra-company service per
hour = 400
Cost of commercial service per hour
= 800
January
February
March
Number
of hours required to break
177.4
176.19
177.4
even:

Efect on income

Price to commercial customers increased to 1000$ and

decrease in demand by 30%

inter company
commercial
total
Variable expenses
contribution margin
fixed expenses
net profit

revenue
hours
89200
223
96600
96.6
185800
9172.79
176627.
21
212939
-
36311.7
9

Efect on income

Price to commercial customers decreased to $600 and

demand increased by 30%

inter company
commercial
total
Variable expences
contribution margin
fixed expences
net profit

revenue
hours
89200
223
107640
179.4
196840
11549.2
185290.
8
212939
-
27648.2

Efect on income

Increase in promotion which increased revenue hours up by

30%

inter company
commercial
total
Variable expenses
contribution margin
fixed expenses
net profit

revenue
hours
89200
223
143520
179.4
232720
11549.
2
221170
.8
204856
16314.
8

Suggestion
Situation:
It is not really a problem to STC
Decreasing loss
Depreciation is not actually an expense which is
large
Recommendation:
Selling the remaining hours by giving discounts
Converting some fixed salaries into variable cost
Should observe the profits for some more period