Variable expenses: Power (the more hours sold the more energy consumed) The hourly personnel (operations) works only when the computers are in operation Fixed expenses: The rent has to be paid despite any level of production ($8000 monthly) The custodial services depend on Salem Telephone?s estimated space they are independent from the revenue of the Company The computer leases were acquired to run the business (before it was actually started up) The maintenance is necessary even when you do not produce/sell anything The deprecation depends on the number of years not on the number of hours sold Operations: salaried stuffSalem Telephone Company Case Study consists of the six people necessary to run the center (the number of people remains the same) Systems development and maintenance the system needs to be developed and maintained constantly to keep the work in process Administration: the salaries are paid on a fixed regular basis Sales promotion: there is a certain amount of money that has been allocated on advertising Corporate services are independent from revenue (are obtained when needed) Sales (should equal an estimated amount) Variable cost per revenue hour remains the same although the activity (the number of revenue hours) varies. 3. Variable cost per unit Power $ 4.70 Operations: hourly personnel $ 24 Revenues $ 192400 Intracompany sales ($ 400 x 205) $ 82000 Commercial sales ($ 800 x 138) $ 110400 Variable Cost ($ 9844.1) Power ($ 47 x 343) ($ 1612.10) Operations: hourly personnel ($ 8232) ($ 24 x 343) CONTRIBUTION MARGIN $ 182555.90 Fixed Costs Rent ($ 8000) Custodial Services ($ 1240) Computer leases ($ 95000) Maintenance ($ 5400) Depreciation Computer equipment ($ 25500) Depreciation office equipment and fixtures ($ 680) Operations: salaried stuff ($ 21600) Systems development and maintenance ($ 12000) Administration ($ 9000) Sales ($ 11200) Sales promotion ($ 8083) Corporate services ($ 15236) ($ 212939) Net Loss ($ 30383.1) The extent to which the intracompany sales cover of the fixed costs: Sale revenue per Unit $ 400 Variable cost per Unit $ 28.70 Intracompany sales ($400 x 205) $ 82000.00 Variable costs ($28.70 x 205) ($ 5883.50) Contribution margin $ 76116.50 Total fixed cost $ 212939.00 Fixed cost covered by intracompany sales ($ 76116.50) Fixed cost remaining $ 136822.5 To reach break-even the amount of $ 136822.50 of fixed cost needs to be covered. Revenue = Variable Costs + Fixed Costs 205($400) + X (800) =(X+205) ($28.7) +$212939 82000 + 800X = 28.7X + 5883.5 + 212939 771.3X = 136882.5 X = 177.3921 177.39 commercial hours need to be sold to break-even Option 1: Net Loss = ($23700) Intracompany revenue hours 223 hours Commercial revenue hours 97 hours Intracompany price per hour $400 Commercial price per hour $1000 Variable cost per unit $28.70 Fixed costs $212939 Intracompany sales revenue $89200 Commercial sales revenue $97000 Total revenue $186200 Variable Cost ($9184) Contribution Margin $177016 NET INCOME ($35923) Income decreases by $12223. Option 2: Revenue hours Intracompany 223 Commercial 179 Total revenue hours 402 Intracompany price per hour $ 400 Commercial price per hour $ 600 Variable cost per unit $ 28.70 Fixed costs $ 212939 Sales Revenue Intracompany (223 * $400) $ 89200.00 Commercial (179 * $600) $ 107400.00 Total revenue $ 196600.00 Variable Cost (402 * $ 28.7) ($ 11537.40) Contribution Margin $ 185062.60 Fixed costs ($ 212939.00) NET INCOME ($ 27876.40) Income decreases by $3948.18 (falls from -$23700 to -$27876.4) Option 3: Revenue hours Intracompany 223 Commercial 179 Total revenue hours 402 Sales Revenue Intracompany (223 * $400) $ 89200 Commercial (179 * $ 800) $ 143200 Total revenue $ 232400.00 Variable Cost (402 * $28.7) ($ 11537.40) Contribution Margin $ 220862.60 Total fixed costs $ 212939 Sales Promotion ($ 8083) Total $ 204856 CM $ 220862.60 Total fixed costs without promotion ($ 204856.00) Could be spent on additional promotion $ 16006.60 At this point it may seem that Salem Data Services (SDS) is a problem to Salem Telephone Company (STC). It could appear to be so based on the loss that was occurring; however SDS was able to increase its revenues over the last three months. SDS could become more profitable if the fixed costs were decreased which are $212939 (that is too much). Maybe it is feasible to convert some of them into variable costs (in order to decrease losses). Also promotion level could be increased. As we saw in question 5(c) increased promotion can increase hours sold by 30 %. Flores should try to sell the remaining hours each month offering some special offers or some bonuses for example. Thus some VC/unit and some of the FC with every unit sold would be covered ? Flores would be able to cover a part of the total fixed cost and as a consequence get a better result at the end of the next months.”
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