Salem Telephone Case Study

Salem Telephone Co. Case Study

Managerial Accounting

Opening:

Salem Telephone Company, later referred to as STC, is a telephone company regulated by the Public Service Commission. Salem Data Services is a subsidiary of STC that provides computer data systems. Peter Flores, the President of STC is aware that his subsidiary is reporting losses and is seeks to find out why and rectify this situation. Questions being posed for the profitability of this firm in to identify variable expenses as they relate to revenue hours and which expenses are fixed according to Exhibit 2. Cost per revenue hour will also be identified for each expense that is variable. A contribution margin income statement for SDS will be constructed assuming the intra-company usage is 205 hours. The March level will be used to present this. A break even analysis will be completed for commercial revenue hours. Flores has offered three possible scenarios for Wu to explore to examine possible outcomes. Using these analyses, we will be able to see what adjustments can be made to variable costs and made an educated decision on the profitability of SDS to STC.

Body:

Question 1- After reviewing Exhibit 2, variable expenses at SDS include Operations: hourly personnel and Power. Fixed expenses include custodial costs and rent as they do not fluctuate.

Question 2- Cost per revenue hour for variable costs:

Jan Feb March

Operations 7,896 7,584 8,664

Power 1,546 1,485 1,697

VC 9,442 9,069 10,361

TRH 329 316 361

VC per Rev Hr 28.70 28.70 28.70

Question 3- A contribution margin income statement follows using the provided variables of intra-company usage is 205 hours for the month of March using Exhibit 2 for numerical values.

Revenues

Commercial 110,400