Prestige Telephone Company

1. Appraise the results of operations of Prestige Data Services (PDS).

In order to make the decision whether to continue the operations of Prestige Data Services, we need to look more closely at Exhibit 2 in the case study. In order to make this decision we need to identify the different kinds of costs incurred by the company.

Firstly, we can categorize the costs in terms of their variability. We see that both fixed (rent, custodial services) and variable (wages and salaries) costs are included in the report. Typically, a manager would only need to look at variable costs and then determine the level of contribution that a given product/service that a company is providing.

Given that the purpose of PDS was to provide a new source of revenue for Prestige Telephone Company (PTC) and to aid the process of deregulation in the industry, we need to consider what would happen if the PDS was the cease their operations.

Effects of closing down PDS:

• Equivalent or higher cost of data services provided by an outside company
• Lost revenue from commercial sales
• Positive cash flow from renting out the office space
• No cost incurred from hiring PDS employees (wages and salaries)
• Opportunity costs of computer leases which are impossible to cancel

In conclusion, PDS should only include variable costs in the report which would be sufficient for making the above mentioned decision. The effects of closing down PDS should also be carefully considered.

1. Estimate the effect on income of each  of the options Rowe has suggested if Bradley estimates as follows:

A)

[pic 1]

Given the change in price and consequently demand, the contribution margin would be lower than under the original scenario. Hence, the company’s income would be higher if it maintains its current pricing.