Prestige Telephone

1 Evaluate the results of operations of Prestige Data Services (Exhibits 1 and 2 of the case). Is the subsidiary really a problem to Prestige Telephone Company?

With a loss over the three months being shown for Quarter 1 of 2003 being $103,251 the company is able to have its subsidiary conduct data operations while losing some money but not a significant amount.

The subsidiary benefits greatly from the low administration costs associated with not having to have independent payroll or other costs associated with being its own company. Obviously the costs of rent and other incentives for the company to keep PDS as a subsidiary keep operations cost low compared to other companies.

The company is actually turning a profit if it charges Prestige telephone the full commercial price and not discounted rate of $400 an hour for use. In January had the parent company been charged the correct amount it would have posted a profit of $40,928 instead of a loss. The lost revenue based on the cap set by the public commission of $82,000 per month for an average.

The unlikely change in the Public Service Commission’s cap on price of data charges. If the company pushed usage to the consumer at a the price it could increase revenue, but in the long run it could cost more for Prestige Telephone that they would have to find a new data service. I do not see PDS as a huge problem for PTC as of the moment and the increased growth in commercial hours looks promising for the company’s future.

2 Briefly analyze the cost behavior of the revenues and expenses for Prestige Data.

For revenue, has some mixed costs at times depending on the result in sales for the month. A fixed piece of revenue is the cap set by the commission on average of $82,000. If Prestige Data reaches that point of sale that is the most it can charge it’s parent company for a month of service. Since the price per unit that is charged is fixed (400/800) then the monthly variable is the number of hours used by each group intercompany and the commercial sales unit is the variable because that unit isn’t a predetermined number each month. The other revenue not clearly listed is a variable as well since there is no clear guidance on its exact nature.

For expenses the following are fixed cost based off the scenario: Rent, Custodial services, equipment cost/maintenance, Depreciation of equipment, all salaries except operations. Some variable costs are the Operations wages, power, materials, sales promotions, and corporate services. All expenses fall in two both the fixed and variable costs totaling into total cost.

3 Assume a variable cost of $28 per hour, commercial revenues of $800 per hour and fixed costs of $115,820. Also, assume actual utilization of 138 hours – this is what is given in Exhibit 1 for March.