Bryan Bishop
Scott Sisson
Christian Wever
A Case Analysis of
Prestige Telephone Co:
Data Servicing
CASE ANALYSIS
Brief
History/Appraisal
Break Even Points
Pricing and Strategy
Changes
Suggestions for
Accounting
Operations
HISTORY (1999)
Question 1
Appraise the results of
operations of Prestige Data
Services.
Is the subsidiary really a
problem to Prestige Telephone
Company?
Consider carefully the
differences between reported
cost and costs relevant for
decisions.
Not a Problem
Contribution Margin
Contribution Margin
Contribution
margin
FIXED
COSTS
Inc.from
operations
Revenue= $212,285
Var. Cost=$50467.80
($139.80*361)
CM Ratio= 76.23% (RVC/R)
-This indicates:
February March
82,400
72,400
89,200
98,400
9,241
190,041
108,000
9,184
189,584
110,400
12,685
212,285
8,000
1,240
9,240
8,000
1,240
9,240
8,000
1,240
9,240
Equipment Cost
Computer Leases
95,000
95,000
Maintenance
5,400
5,400
Depreciation:
Computer Equipment
25,500
25,500
Office Equipment and Fixtures
680
680
Power
1,633
1,592
128,213
128,172
Wages and Salaries
Operations
29,496
29,184
System Development and Maintenance
12,000
12,000
Administration
9,000
9,000
Sales
11,200
11,200
TOTAL WAGES
61,696
61,384
Materials
9,031
8,731
Sales Promotion
7,909
7,039
Coporate services
15,424
15,359
95,000
5,400
25,500
680
1,803
128,383
30,264
12,000
9,000
11,200
62,464
10,317
8,083
15,236
January
Revenues
Intercompany Sales
Commercial Sales
Computer Sales
Other
Total Revenue
Expenses
Space Cost:
Rent
Custodial Services
February March
82,400
72,400
89,200
98,400
9,241
190,041
108,000
9,184
189,584
110,400
12,685
212,285
Equipment Cost
Computer Leases
SUNK COST
Maintenance
5,400
5,400
5,400
Depreciation:
Computer Equipment
25,500
25,500
25,500
Office Equipment and Fixtures
680
680
680
Power
1,633
1,592
1,803
33,213
33,172
33,383
Wages and Salaries
Operations
29,496
29,184
30,264
System Development and Maintenance
12,000
12,000
12,000
Administration
9,000
9,000
9,000
Sales
11,200
11,200
11,200
TOTAL WAGES
61,696
61,384
62,464
Materials
9,031
8,731
10,317
Sales Promotion
7,909
7,039
8,083
Coporate services
INTERNAL FC (.25*TOT.WAGE)
BREAKING EVEN
Assuming the company
demand for service will
average 205 hours per
month, what level of
commercial sales of
computer use would be
necessary to break even
each month?
BREAKING EVEN
197
Commercial
Hours
How did we
calculate that?
COSTS
VARIABLE
Power
Salaries Operations
Materials
Sales Promotion
Total Variable Costs
iable Cost per Hour
$1,803.00
$30,264.00
$10,317.00
$8,083.00
$50,467.00
$139.80
FIXED
Space Cost:
Rent
$8,000.00
Custodial Services
$1,240.00
Equipment Cost:
Computer Leases
$95,000.00
Maintenance
$5,400.00
Depreciation:
Computer Equipment
$25,500.00
Office Equipment and Fixtures
$680.00
Wages and Salaries:
System Development and Maintenance
$12,000.00
Administration
$9,000.00
Sales
$11,200.00
Coporate services
$15,236.00
Total Fixed Costs
$183,256.00
Break Even
Earnings=Sales-Costs
Sales=Price1*Hours1+Price2*Hours2
Costs=FixedCosts+VaribleCosts*Hours1+VariableCosts*Hours2
To get a Brake Even Point, Earnings=0. So we get:
0=800(x)+400(205)-183,256-139.80(x)-139.80(205)
0=660.20(x)-129,915
x=196.78
FC
$183,256.00
Price1
$800.00
Price2
$400.00
VC
$139.80
Hours1
Hours2
205.00
Future Options:
Alter Operations
February
$
$
$
82,400.00
86
86,000.00
9,241.00
177,641.00
$
$
$
42,663.06 $
183,444.00 $
226,107.06 $
(48,466.06) $
$
$
$
72,400.00
95
95,000.00
9,184.00
176,584.00
March
$
$
$
$
244,000.00
278
278,000.00
31,110.00
553,110.00
40,654.10 $
183,379.00 $
224,033.10 $
44,735.29 $
183,256.00 $
227,991.29 $
128,052.46
550,079.00
678,131.46
(47,449.10) $
(29,106.29) $
(125,021.46)
$
$
$
89,200.00
97
97,000.00
12,685.00
198,885.00
Total Qtr
$
January
February
March
Total Qtr
$ 82,400.00
160
$ 96,000.00
$ 9,241.00
$ 187,641.00
$ 72,400.00
176
$ 105,600.00
$ 9,184.00
$ 187,184.00
$ 89,200.00
180
$ 108,000.00
$ 12,685.00
$ 209,885.00
$ 244,000.00
516
$ 309,600.00
$ 31,110.00
$ 584,710.00
January
February
March
Total Qtr
$ 82,400.00
160
$ 128,000.00
$ 9,241.00
$ 219,641.00
$ 72,400.00
176
$ 140,800.00
$ 9,184.00
$ 222,384.00
$ 89,200.00
180
$ 144,000.00
$ 12,685.00
$ 245,885.00
$ 244,000.00
516
$ 412,800.00
$ 31,110.00
$ 687,910.00
0.00 $ (30,858.13)
February
$
$
$
$
82,400.00
99
79,200.00
9,241.00
170,841.00
$
$
$
$
63,493.00
43,651.44
183,444.00
227,095.44
(56,254.44) $
March
$
$
$
$
72,400.00
108
86,400.00
9,184.00
167,984.00
$
$
$
$
61,905.00
42,559.69
183,379.00
225,938.69
Total Qtr
$
244,000.00
$
$
$
89,200.00
111
88,800.00
12,685.00
190,685.00
$
$
$
254,400.00
31,110.00
529,510.00
$
$
$
$
65,703.00
45,170.81
183,256.00
228,426.81
$
$
$
$
191,101.00
Mon Tue Wed Thr Fri
131,381.94
Hours
24
24
24 24 24
550,079.00 New Hours 16 16 16 16 16
681,460.94
(57,954.69) $
(37,741.81) $ (151,950.94)
NEW PROPOSSAL
Other Suggestion:
Raise Inter-company Rate
Revenues
Intercompany Sales
Comercial Sales Computer Use
Other
Total Revenue
January
February
March
Hrs
$ 164,800.00 206
$ 98,400.00 123
$ 9,241.00
$ 272,441.00 329
Hrs
$ 144,800.00 181
$ 108,000.00 135
$ 9,184.00
$ 261,984.00 316
Hrs
$ 178,400.00 223
$ 110,400.00 138
$ 12,685.00
$ 301,485.00 361
$ 261,984.00
$ 46,546.00
$ 183,379.00
$ 32,059.00
$ 301,485.00
$ 50,467.00
$ 183,256.00
$ 67,762.00
$ 72,400.00
$ 144,800.00
$ (72,400.00)
$ 89,200.00
$ 178,400.00
$ (89,200.00)