Salem Telephone Company

In: Business and Management

Submitted By martinwtleung
Words 753
Pages 4
Through our study of Salem Telephone Company (STC), we’re going to answer that if Salem Data
Services (SDS) is really a profitable business to keep by using break-even point analysis. Before we come out the final solution, let’s discuss SDS’ accounting report step by step.
First, we have to divide the various costs incurred in SDS into two types: variable costs and fixed costs.
From Exhibit 2 we can see that only “Power” and “Operations: hourly personnel” are variable costs that have relation to the total revenue hours. Other expenses listed in Exhibit 2 are all fixed costs (Q1).
Besides, we can calculate the unit variable costs per revenue hour as follows (Q2):
January February March
Power 1,546 1,485 1,697
Operations: hourly personnel 7,896 7,584 8,664
Total variable costs 9,442 9,069 10,361
Total revenue hours 329 316 361
Variable costs per revenue hour 28.70 28.70 28.70
Furthermore, by distinguish the variable costs and fixed costs, we can construct the contribution margin income statement for SDS at March level, assuming 205 hours for intracompany usage (Q3):
Revenues
Intracompany 82,000
Commercial 110,400
Total Revenues 192,400
Variable expenses (power + hourly personnel) 9,844
Contribution margin 182,556
Fixed expenses
Rent 8,000
Custodial services 1,240
Computer leases 95,000
Maintenance 5,400
Depreciation 26,180
Salaried staff 21,600
System development 12,000
Administration 9,000
Sales 11,200
Sales promotion 8,083
Corporate services 15,236
Total fixed expenses 212,939
Net income -30,383
Based on above assumptions, we can obtain the number of commercial revenue hours as follows:
82000 800 5884 28.7 212939 0
(205 400 800) 28.7 (205 ) 212939 0
+ − − − =
× + × − × + − = x x x x 177.39 178
800 28.7
212939 82000 5884
= @

− + x =
Therefore, SDS needs to serve at least 178 commercial hours to break even (Q4).
(Q5)…...

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