Salem Telephone Company Essay

Peter Flores is the president of Salem Telephone Company and has been faced with an issue with a subsidiary company, Salem Data Services. This subsidiary company has not had a profitable month yet and Flores is determined the drain on Salem Telephone Company’s resources needs to be reduced. Flores plans on analyzing all fixed and variable expenses to decide how to best resolve the issue.

The 2004 first quarter reports, which include the summary of computer utilization and results of operation, show that the Data Services division needs to be analyzed in order to understand why they are continuing to operate at a loss. The key areas of opportunity to address are current utilization of computer usage hours, the consistent negative results of the operations, and conversion of any fixed costs to variable costs related to the level of work.

The first action involves determining which portion of expenses that are fixed costs and which are variable costs. Variable costs equal $30,194.92; our analysis starts with an inspection of the variable and fixed costs of Salem Data Services. From the collected data it is clear that the variable costs averaging $31,194.92 over the first quarter are not sufficient to overcome the current fixed costs that equal $189,620.This statement makes no sense. Variable costs never overcome fixed costs. There is no value in this type of comparison. IS the intent to look at net income? The company should review the salaries of the sales division and create a pay structure that is tied to revenue and sales. In addition, the sales promotion can also be tied to sales or revenue to convert these costs into variable costs.

The second issue to be address is the underutilization of the computer hours available versus computer hours used. The company is currently averaging about 60% utilization of available hours. The commercial sales are seriously underutilized and need to be focused on to drive commercial sales up. Commercial demand may need to be re-assessed to determine if there is a big enough market to serve. A reconstructing of the sales promotion strategy may produce profitable results.

Overall, Salem Data Services has the possibility to become a profitable subsidiary of Salem Telephone Company. The decision to shut down the division is a bit premature and the organization needs to revisit their promotion and sales strategy to focus on increasing commercial sales and maximizing the utilization of their computer hours. Additionally, converting sales and sales promotion to variable costs may also prove to be a motivation to the sales staff to push sales harder and to achieve additional customers.

1) “Revenue hours” represent the key activity that drives cost at Salem Data Services. Which expenses are variable with respect to revenue hours? Which expenses are fixed with respect to revenue hours?

The variable costs