Prestige Telephone Company

I. Commercial Sales Breakeven

Assuming Prestige Telephone’s demand for services will average 205 hours per month, it is necessary to have monthly commercial sales of $117,696.08 (~147 hours) in order to break even each month. Given that average monthly commercial hours for Q1 are 132, Prestige Data Services only needs to generate additional commercial business of 15 hours to break even. This is based on a pro forma analysis breaking expenses into fixed (grey) and variable (yellow) costs. Cost drivers for the variable expenses were assumed average monthly total revenue hours with the exception of corporate services, as these expenses are driven by salary levels. Given this analysis, we do not see that the subsidiary is a problem to the parent organization. It can easily be brought to profitable levels given only a small increase of existing third party business. Given that there are on average 177 additional hours available for revenue production, the subsidiary has ample capacity to generate healthy profits for the parent organization.

II. Effects of a Commercial Pricing Change

A 25% increase in the price for commercial customers will reduce demand by 30%, reducing average monthly revenue hours from 132 to 92.4. This will result in a reduction in revenue of almost 15%, compared to the average monthly revenue generated from commercial customers. After adjusting the rates for power, operations salaries, materials, sales promotions and corporate services based on the new number of revenue hours, Prestige will incur a loss of $40,648 if a rate hike is put into place.

III. Proposed Accounting System Changes

The most important adjustment needed for the accounting system is that some amount of savings should be estimated for the parent company,