prestige telephone company (online case analysis)

8/10/2019 Prestige Telephone Company (Online Case Analysis)

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PRESTIGE DATA SERVICES

A Case Analysis of

Prestige Telephone Co:Data ServicingBryan Bishop

Scott Sisson

Christian Wever


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CASE ANALYSIS

BriefHistory/AppraisalBreak Even PointsPricing and StrategyChangesSuggestions forAccountingOperations


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HISTORY (1999)

Due to partial deregulation &agreement with PSC.Create PDS to increase Revenue w/oraising rates.Separate, Unregulated wholly-ownedsubsidiaryAvg. Monthly charge


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Appraise the results ofoperations of Prestige Data

Services.

Is the subsidiary really aproblem to Prestige TelephoneCompany?

Consider carefully thedifferences between reportedcost and costs relevant fordecisions.

Question 1


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Not a Problem

Contribution Margin

Relevant Costs vs. Reported

More time needed


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Contribution Margin

Revenue= $212,285Var. Cost=$50467.80

($139.80*361)CM Ratio= 76.23% (R-

VC/R)

-This indicates:A large increase in operating incomewith increase sales volume. (currentlybelow capacity)

Thus, increase in sales promotion willgenerate this outcome.

FIXED

COSTS

Contributionmargin

Inc.fromoperations


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Reported vs. Relevant

Expense for PDS, but Revenue for PTS.

Space costs and Corporate Servicecosts are irrelevant for analysis.By removing get a better picture.


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Reported vs. RelevantJanuary February March January February March

Revenues Revenues

Intercompany Sales 82,400 72,400 89,200 Intercompany Sales 82,400 72,400 89,200 Commercial Sales Commercial Sales Computer Sales 98,400 108,000 110,400 Computer Sales 98,400 108,000 110,400 Other 9,241 9,184 12,685 Other 9,241 9,184 12,685 Total Revenue 190,041 189,584 212,285 Total Revenue 190,041 189,584 212,285Expenses Expenses Space Cost: Space Cost: Rent 8,000 8,000 8,000 Rent INTERNAL FIXED COSTS Custodial Services 1,240 1,240 1,240 Custodial Services

9,240 9,240 9,240Equipment Cost Equipment Cost Computer Leases 95,000 95,000 95,000 Computer Leases SUNK COST Maintenance 5,400 5,400 5,400 Maintenance 5,400 5,400 5,400Depreciation: Depreciation: Computer Equipment 25,500 25,500 25,500 Computer Equipment 25,500 25,500 25,500 Office Equipment and Fixtu 680 680 680 Office Equipment and Fixtu 680 680 680Power 1,633 1,592 1,803 Power 1,633 1,592 1,803

128,213 128,172 128,383 33,213 33,172 33,383 Wages and Salaries Wages and Salaries Operations 29,496 29,184 30,264 Operations 29,496 29,184 30,264 Syste m De ve lopme nt a nd 12,000 12,000 12,000 S yste m De ve lopme nt a nd 12,000 12,000 12,000 Administration 9,000 9,000 9,000 Administration 9,000 9,000 9,000 Sales 11,200 11,200 11,200 Sales 11,200 11,200 11,200 TOTAL WAGES 61,696 61,384 62,464 TOTAL WAGES 61,696 61,384 62,464 Materials 9,031 8,731 10,317 Materials 9,031 8,731 10,317Sales Promotion 7,909 7,039 8,083 Sales Promotion 7,909 7,039 8,083Coporate services 15,424 15,359 15,236 Coporate services INTERNAL FC (.25*TOT.WAGE)


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BREAKING EVEN

Assuming the company

demand for service willaverage 205 hours permonth, what level ofcommercial sales ofcomputer use would benecessary to break eveneach month?


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BREAKING EVEN

197 Commercial

HoursHow did we

calculate that?


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Fixed and Variable CostsApril

Revenues Per hour Hrs Intercompany $400.00 205 $89,200.00

Comercial Sa $800.00 x Other $0.00 Total Revenue 205 + x $89,200+(X*800)

COSTSV A R I A B L E

Power $1,803.00Salaries Operations $30,264.00Materials $10,317.00

Sales Promotion $8,083.00 Variable Costs $50,467.00

Cost per Hour $139.80

F I X E D

Space Cost: Rent $8,000.00 Custodial Services $1,240.00Equipment Cost: Computer Leases $95,000.00 Maintenance $5,400.00Depreciation: Computer Equipment $25,500.00 Office Equ ipment and Fixtures $680.00Wages and Salaries: System Development and Mai $12,000.00 Administration $9,000.00

Sales $11,200.00 Coporate services $15,236.00t a l F ix e d C o s t s $183,256.00


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Break EvenFC $183,256.00

Earnings=Sales-Costs Price1 $800.00Sales=Price1*Hours1+Price2*Hours2 Price2 $400.00Costs=FixedCosts+VaribleCosts*Hours1+VariableCosts*Hours2 VC $139.80To get a Brake Even Point, Earnings=0. So we get: Hours1 X

0=800(x)+400(205)-183,256-139.80(x)-139.80(205) Hours2 205.000=660.20(x)-129,915x=196.78Brake Eve 196.78 197.00 Commercial Hours


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Future Options:

Alter Pricing Models

Alter Operations

Increase Promotional Efforts

I i i l


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Increase price to commercialcustomers to $1,000 per hour.Demand reduced by 30%.

Increase Price to commercial user to $1000 per hour 30% decrease in demand for commercial users

January February March Total Qtr Revenues

Intercompany Sales 82,400.00$ 72,400.00$ 89,200.00$ 244,000.00$Commercial Hours 86 95 97 278

Commercial Sales 86,000.00$ 95,000.00$ 97,000.00$ 278,000.00$Other 9,241.00$ 9,184.00$ 12,685.00$ 31,110.00$

Total Revenue 177,641.00$ 176,584.00$ 198,885.00$ 553,110.00$

Costs Variable Costs 42,663.06$ 40,654.10$ 44,735.29$ 128,052.46$Fixed Costs 183,444.00$ 183,379.00$ 183,256.00$ 550,079.00$Total Costs 226,107.06$ 224,033.10$ 227,991.29$ 678,131.46$

Net Profit (Loss) (48,466.06)$ (47,449.10)$ (29,106.29)$ (125,021.46)$

R d i i l


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Reduce price to commercialcustomers to $600 per hour.Demand increased by 30%.

Decrease Price to commercial users to $600 per hour 30% increase in demand for commercial users


Intercompany Sales 82,400.00$ 72,400.00$ 89,200.00$ 244,000.00$Commercial Hours 160 176 180 516


Total Revenue 187,641.00$ 187,184.00$ 209,885.00$ 584,710.00$

Costs Variable Costs 53,474.94$ 52,585.20$ 56,338.51$ 162,398.64$

Fixed Costs 183,444.00$ 183,379.00$ 183,256.00$ 550,079.00$Total Costs 236,918.94$ 235,964.20$ 239,594.51$ 712,477.64$

Net Profit (Loss) (49,277.94)$ (48,780.20)$ (29,709.51)$ (127,767.64)$


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d h


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Reduce operations to 16 hours onweekdays and 8 hours onSaturdays. Lose 20% of commercialhours.

Change working hoursDecrease demand by 20%


Intercompany Sales 82,400.00$ 72,400.00$ 89,200.00$ 244,000.00$Commercial Hours 99 108 111


Total Revenue 170,841.00$ 167,984.00$ 190,685.00$ 529,510.00$

Costs Variable Costs 63,493.00$ 61,905.00$ 65,703.00$ 191,101.00$ Mon Tue Wed Thr FriNew Variable Costs 43,651.44$ 42,559.69$ 45,170.81$ 131,381.94$ Hours 24 24 24 24 24 Fixed Costs 183,444.00$ 183,379.00$ 183,256.00$ 550,079.00$ New Hours 16 16 16 16 16 Total Costs 227,095.44$ 225,938.69$ 228,426.81$ 681,460.94$

Net Profit (Loss) (56,254.44)$ (57,954.69)$ (37,741.81)$ (151,950.94)$


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NEW PROPOSSAL


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Other Suggestion:Raise Inter-company Rate

January February March

Revenues Hrs Hrs H Intercompany Sales 164,800.00$ 206 144,800.00$ 181 178,400.00$ 223 Comercial Sales Computer Use98,400.00$ 123 108,000.00$ 135 110,400.00$ 138

Other 9,241.00$ 9,184.00$ 12,685.00$Total Revenue 272,441.00$ 329 261,984.00$ 316 301,485.00$ 361


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Proposal to Board of DirectorsTotal Revenue 272,441.00$ 261,984.00$ 301,485.00$Total Variable Costs 48,069.00$ 46,546.00$ 50,467.00$

Total Fixed Costs 183,444.00$ 183,379.00$ 183,256.00$Net Profit 40,928.00$ 32,059.00$ 67,762.00$

Difference in Intercompany RevenueOld Way 82,400.00$ 72,400.00$ 89,200.00$New Way 164,800.00$ 144,800.00$ 178,400.00$

Difference (82,400.00)$ (72,400.00)$ (89,200.00)$

This means that Prestige Thelephone company is making a profitout of Prestige Data Services by not allowing them to charge fullprice for their services, being their biggest client and consumingthe majority of the hours.

prestige telephone company (online case analysis)

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