Salem Telephone Case
Autor: acebo • August 13, 2015 • Essay • 583 Words (3 Pages) • 1,500 Views
5) The following three equations will estimate the effect on income of each of the options Flores has suggested to Wu:
1) Increasing the price to commercial customers to $1,000 per hour would reduce demand by 30%.
Hours for Commercial Customers = 138
138 * .30 = 41.4 demand hours decrease
138 Commercial Hours – 41.4 Lost demand = 96.6 or 97 new demand hours
Effect on Income:
Total fixed= $212,939
Intracompany Sales = $82,000
New Commercial Sales = 97 * $1000 = $97,000
Intracompany Hours + Commercial Hours = 205+97 = 302
Variable Cost: 302 * $28.7 = $8,667.4
(($82,000 + $97,000) - $8,667.4) -$212,939 = ($42,606.4) or ($42,606)
By increasing the price for commercial customers to $1000, this will make the income at a total loss of $42,606.4
2) Reducing the price to commercial customers to $600 per hour would increase demand by 30%.
Hours for Commercial Customers = 138
138 * 1.30 = 179.4 or 180 demand hours increase
Total fixed= $212,939
Intracompany Sales = $82,000
New Commercial Sales = 180 * $600 = $108,000
Intracompany Hours + Commercial Hours = 205+180 = 385
Variable Cost: 385 *$ 28.7 = $11,049.5
(($82,000 + $108,000) - $11,049.5) -$212,939 = ($33,988.5) or ($33,989)
By decreasing the price for commercial customers to $600, this will make the income of the company have a total loss of $33,988.5
3) Increased promotion would increase revenue hours by up to 30%, Wu is unsure how much promotion this would take. (How much could be spent and still leave Salem Data Services with no reported loss each month if commercial hours were increased by 30 %.)
Hours for Commercial Customers = 138
138 * 1.30 = 179.4 or 180 demand hours increase
Total fixed= $212,939
Intracompany Sales = $82,000
New Commercial Sales = 180 * $800 = $144,000
Intracompany Hours + Commercial Hours = 205+180 = 385
Variable Cost: 385 * 28.7 = $11,049.5
(($82,000 + $144,000) - $11,049.5) -$212,939 = $2,011.5 or $2,012
By increasing promotion, the maximum promotion would be $2,011.5
6.
Although Salem Data Services is still encountering issues, the analysis concludes that the subsidiary is more beneficial than detrimental. If Salem Telephone Company were to extinguish Salem Data Services, they would inquire much higher costs to partner with an outside company for the necessary computer services. Because a net loss was experienced in the last three months, they need first focus on breaking even. They could utilize techniques such as reworking the compensation plan with salaries based on sales commission in efforts to reduce fixed costs.
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