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Salem Telephone Company
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Salem Telephone Co. – Case Solution
Salem Telephone Co., a computer subsidiary, has been losing profits. Its managers are tasked with determining if it is actually unprofitable. Likewise, they must look into price changes and other promotions which might help increase the profits.
William J. Bruns Jr.; Julie H. Hertenstein Harvard Business Review ( 104086-PDF-ENG ) June 07, 2004
Case questions answered:
- Which expenses are variable and fixed with respect to revenue hours?
- Calculate the cost per hour for each variable expense.
- Prepare a contribution margin statement for Salem Data Services, assuming that intra-company usage is 205 hours. Assume commercial usage is at the march level.
- Assuming the inter-company demand for service will average 205 hours per month, what level of commercial revenue hours of computer use would be necessary to break even each month?
- Estimate the effect of income of each of the options Flores has suggested if Wu estimates as follows: Option 1: Increasing the price for commercial customers to $1000 per hour would reduce demand by 30%. Option 2: Reducing the price for commercial customers to $600 per hour would increase demand by 30%. Option 3: Increased promotion would increase revenue hours by up to 30%. Wu is unsure how much this promotion 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%).
- Based on your analysis above, is Salem Data Service really a problem for Salem Telephone Co.? What should Flores do about Salem Data Service?
Not the questions you were looking for? Submit your own questions & get answers .
Salem Telephone Co. Case Answers
Q.1: which expenses are variable and fixed with respect to revenue hours.
Variable expenses:
- Power Expense
- Operations: Hourly personnel
Fixed Expenses:
- Rent Expense
- Custodial service
- Computer leases
- Maintenance
- Depreciation: Computer equipment Office equipment
- Operations Salaried Staff
- System development and maintenance
- Administration
- Sales promotions
- Corporate services
Q.2: Calculate the cost per hour for each variable expense.
![salem telephone company case study pdf Salem Telephone](https://www.casehero.com/wp-content/uploads/2019/01/1-1.png)
Q.3 Prepare a Contribution margin statement for Salem Data services, assuming that intracompany usage is 205 hours. Assume commercial usage is at the march level.
Income statement for Salem Data Services . From the article, I know that intracompany work was billed at $400 per hour, and commercial sales were billed at $800 per hour.
So, intracompany contribution margin: $400-$28.7= $371.3/hour while Commercial contribution margin: $800-$28.7=$771.3/hour
Salem Data Service Contribution Margin statement For the month ended March 2004
![salem telephone company case study pdf Contribution Margin](https://www.casehero.com/wp-content/uploads/2019/01/1-2.png)
Q.4 Assume the intercompany demand for service will average 205 hours per month. What level of commercial revenue hours of computer use would be necessary to break even each month?
Break-even point = Fixed costs/ CM per unit
Let’s suppose A is the commercial revenue hours to break even
Sales revenue per unit = $82,000/205= $400.00
Variable cost per unit = $9,844.10/343= $28.70
(205 x $400 + A x $800) – 28.70 x (205 + A) – 212,939 = 0
82,000 + 800A – 28.70A – 5883.50 – 212,939 = 0
-136,822.50 + 771.30A = 0
771.30 A = 136,882.50
Salem Data Services would need 177.39 commercial hours to break even each month.
Q.5 Estimate the effect of income of each of the options Flores has suggested if Wu estimates as follows:
Option 1: increasing the price for the commercial customer to $1000 per hour would reduce demand by 30%..
Original March data
P= Net Income= ($23,700)
For option 1:
Commercial revenue hours 138
A 30% decrease in demand would result in revenue hours of:
138*0.3= 41.4
138-41.4= 96.6 hours
Commercial revenue per hour cost increased to $1000/hour, and for intracompany, cost per hour would be the same as no assumption is given for intracompany.
205+96.6= 301.6 hours in total to calculate Variable cost.
Commercial revenue 96.6(1000) = $96,600
Intra-company revenue 205 (400) =$82,000
Less Variable cost 301.6 (28.7) = ($8655.92)
Less Fixed cost = ($212,939)
Net income= Revenue-Variable cost- fixed cost
Net income= ($42,994.2)
Option 2: Reducing the price for commercial customers to $600 per hour would increase demand by 30%.
With a 30% increase in demand would result in revenue hours of:
138+41.4= 179.4 hours
Commercial revenue per hour cost decreased to $600/hour, and for intracompany, cost per hour would be the same as no assumption is given for intracompany.
205+179.4= 384.4 hours in total to calculate Variable cost.
Commercial revenue 179.4(600) = $107640
Intracompany revenue 205 (400) =$82,000
Less Variable cost 384.4(28.7) = ($11032.82)
Net income= ($34331.28)
Option 3: Increased promotion would increase revenue hours by up to 30%. Wu is unsure how much this promotion 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%).
Assuming commercial per-hour costs are $800 because there is no price assumption, take the original per-hour cost. The intracompany cost per hour would be the same as no assumption is given for intracompany.
Commercial revenue 179.4(800) = $143,520
Net income= $1548.72
For options 1 and 2, the company would be in a loss, and for option 3, if the company is still spending $1548.72, there would be no loss to the company spending more than $1548.72, which will result in a loss. It could be spent on either sales promotion or corporate services costs.
Q.6: Based on your analysis above, is Salem Data service really a problem for Salem Telephone Co.? What should Flores do about Salem Data Service?
Based on my analysis above, I can say that Salem Telephone Co. should keep Salem’s data service. This is a new startup, so every new start-up business faces losses at the beginning because customers are less -aware of the product/service, and awareness takes time.
Slowly and gradually, its loss is decreasing. From Exhibit 2, we can see that from February to March, loss has decreased by almost $17000.
Salem data service has huge fixed costs, and profits are not in the beginning months. Salem Telephone should keep Salem data service. If not, then they could save fixed costs, but they have to pay/spend money for purchasing intracompany revenue hours.
If Salem data service is closed, then the situation would be like this:
![salem telephone company case study pdf Salem Telephone](https://www.casehero.com/wp-content/uploads/2019/01/1-3.png)
Salem company would save the cost of ($86884), but he would purchase intracompany hours of $164,000.
Flores should continue to operate Salem Data Company. They should focus more on marketing strategies to make customers more aware of their service. Also, they should revise their cost strategies to decrease fixed expenses and increase profits.
They should apply the pricing strategy of option 2 in the 5th question to decrease per hour price, so this would increase demand by 30% or more percentage. As the price is reduced, automatically, it will increase sales and will take the company towards profits.
Another thing they can do is to prepare budgets where commercial revenue hours will be forecasted, and the decision could be made that makes the company profitable.
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the first test of the course with professor Adam in year 2003 of the September starters case Salem solution salem telephone co. case solution 11:39 am casehero. Skip to document. University; High School. ... JULIE H. HERTENSTEIN104086-PDF-ENG) JUNE 07, 2004. Case questions answered: ... I can say that Salem telephone company should keep Salem ...
5 pages Salem_Telephone_Company_Case_Study_solution Florida Institute of Technology BUS 5431. 12 pages 4807-19243-1-PB Gift University ADVANCE RE 703. test_prep. Kiran Temple University Fox School of Business '17, Course Hero Intern. Company. About Us Scholarships Sitemap Q&A Archive Standardized Tests Education Summit ...
Bruns, William J., Jr., and Julie Hertenstein. "Salem Telephone Company." Harvard Business School Case 104-086, June 2004. (Revised November 2005 ...
This case study analyzes the financial performance of Salem Telephone Company. It identifies the company's variable and fixed expenses. Variable expenses include power costs and hourly wages, while fixed expenses include rent, maintenance, and administration. The document then provides revenue and cost data for January-March and calculates break-even commercial hours. It evaluates three ...
Ust Tobacco Company Case Study UST has been a dominant company in the tobacco. industry especially, in the moist tobacco industry. The. company internalizes conservative debt policy and high. dividend 646 Words | 3 Pages. Salem Telephone Company Case Study Salem Te l e p h o n e Company Case Study Group 9 1) The
Harvard Business Review (104086-PDF-ENG) June 07, 2004. Case questions answered: ... Salem Telephone Co. Case Answers Q.1: Which expenses are variable and fixed with respect to revenue hours? Answer: Variable expenses: ... Salem company would save the cost of ($86884), but he would purchase intracompany hours of $164,000. ...
Salem Telephone Co. By: William J. Bruns Jr., Julie H. Hertenstein. A computer subsidiary appears to be unprofitable. Managers must determine whether it is actually unprofitable and consider whether changes in prices or promotion might improve profitability. Allows…. Length: 5 page (s) Publication Date: Jun 7, 2004. Discipline: Accounting.
Transcribed image text: Salem Telephone Company In April 2004, Peter Flores, president of Salem Telephone Company, was preparing for a meeting with Cynthia Wu, manager of Salem Data Services. An agreement with the state Public Service Commission had permitted Salem Telephone to establish Salem Data Services, a computer data service subsidiary ...
Case Study Salem Telephone.docx - Free download as Word Doc (.doc / .docx), PDF File (.pdf), Text File (.txt) or read online for free. 1. The document analyzes the revenue and expenses of Salem Telephone Company over three months. It classifies expenses as either variable or fixed. Variable expenses include power costs and hourly wages, while fixed expenses include rent, equipment costs ...
978-3-659-45084-6. Ojulari Abdulkabir. Download Free PDF. View PDF. 9-104-086 REV: NOVEMBER 1, 2005 WILLIAM J. BRUNS, JR. JULIE HERTENSTEIN Salem Telephone Company In April 2004, Peter Flores, president of Salem Telephone Company, was preparing for a meeting with Cynthia Wu, manager of Salem Data Services.
Variable cost per revenue hour is $28.70/hr. Question 3. - Price per unit is $400/hr internal and $800/hr external. - Intracompany contribution margin: $371.30/hr. - Commercial contribution margin: $771.30/hr. Assume STC will fully utilize their allowable hours. The next allowable hour will be a commercial hour; therefore we consider the ...
Doing this will allow the company to exert all its resources, increase their profit and ensure a bright future ahead. Prof. Sherman Case #1- Salem Telephone company Fixed costs (expenses) 212, Net Income (30,383) 4 Intracompany contribution margin= 400-28 = 371/hr. Commercial contribution margin = 800-28.7=771/hr 205 x 371 = $76,116.
Download PDF - Salem Telephone Company Case Study [gen5xyd61elo]. ...
Salem Telephone Company Case Study 1. Variable Expenses with respect to revenue hours: Power expense, hourly personnel salaries expense. Fixed expenses with respect to revenue hours: Rent, custodial services, computer leases, maintenance, depreciation of computer equipment and office equipment and fixtures, operations salaried staff, systems development and maintenance, administration, and ...
Prestige Telephone Company Case Study. Case Summary Prestige Data Services is a subsidiary of Prestige Telephone Company, designed to perform data processing f . 347 31 388KB Read more. salem telephone. ... Report "Salem Telephone Company Case Study" Your name. Email.
They needed an alternate company to compensate for the loss due to regulation of telephone service rates. Peter Flores, president of Salem Telephone Company wanted to have a fully owned separate company that will not be regulated. Revenue generated from Salem Data Services will be used to pay the cost of Salem Telephone Company. 3. What are the ...
That means even if SDS sell nothing the rent has to be paid.2 The custodial services are fixed cost because they depend on Salem Telephone's estimated annual cost per square foot and so they are independent from the revenue of SDS.3 The computer equipment is a fixed cost due to the fact that normally they were purchased before starts the ...