Salem Telephone Company Case Analysis

Yin Wang

ACCT801

03/09/2016

Salem Telephone Company Case Analysis

Salem Data Services (SDS), as a computer data service subsidiary, was established by Salem Telephone Company. SDS is wholly-owned by Salem Telephone Company. According to accounting principles, Salem Telephone Company should prepare consolidated financial statements and all intercompany balances and transactions should be eliminated. This means that Salem Telephone Company’s financial statements are an aggregation (an adding up) of those of the parent company, Salem Telephone Company, and all its subsidiary companies, including Salem Data Services, less any intercompany activities such as intercompany sales or receivables.

However, SDS have some problems according to the summary results of operations. SDS should utilize its remaining hours to sale. The net loss has declined from January to March, partly due to the increase in sales in both intra-company sector and commercial sector. SDS still have around 225 hours available to sell. If SDS can utilize these hours, especially increase its commercial sales, its revenue will increase.

In order to analyze whether or not to shut down Salem Data Services, conducting the break-even point is essential to consider the ambiguity. First, it is important to determine whether these costs for SDS are variable or fixed. Rent, Custodial services, Computer leases, Maintenance, Depreciation, Salaried staff, Systems development and maintenance, Administration, Sales promotion, and Corporate services are fixed expense. Except for the cost for sales promotion and corporate services, all of these expenses had the same costs from January to March, a main reason that these expenses are fixed. In terms of sales promotion and corporate services, the expenses were arbitrary numbers that were used at the company’s discretion. Thus, the total fixed cost = $212939. Additionally, the other two expenses, Power and Hourly personnel, are directly related to revenue hours; therefore, these two are variable cost.

Before conducting the break-even point, I assume that intra-company usage is 205 hours ($82000/$400) and that commercial usage is 138 hours (March). Through calculating the break-even point, we can see: variable cost per united: power is $1697 / 361 = $4.7 and operation: hourly personnel is $8664 / 361 = $24. So, SDS’s variable cost = (205 + 138) * ($4.70 + $24) = $9844.1.

Since total revenues = intra-company sales + commercial sales = 205 * $400 + 138 * $800 = $192400, so the contribution margin = total revenue – variable cost = $192400 - $9844.10 = $182555.9. Further, the net operation income = contribution margin – fixed cost = $182555.9 – $212939 = ($30383.1).