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PRESTIGE DATA SERVICES

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)

Due to partial deregulation &


agreement with PSC.
Create PDS to increase Revenue w/o
raising rates.
Separate, Unregulated wholly-owned
subsidiary
Avg. Monthly charge <$82,000

HISTORY (End of 2002)

Lowest return on Investment in 7 years


of business.
Due to poor forecasting
Bradley says, only need more time.
Rowe says, time for analysis and
change.

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

Relevant Costs vs. Reported


More time needed

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:

A large increase in operating income


with increase sales volume. (currently
below capacity)
Thus, increase in sales promotion will
generate this outcome.

Reported vs. Relevant

Expense for PDS, but Revenue for PTS.


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

Reported vs. Relevant


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

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

INTERNAL FIXED COSTS

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?

Fixed and Variable Costs


April
Revenues
Pe r hour
Hrs
Intercompany Sales
$400.00
205
$89,200.00
Comercial Sales
$800.00
Computer
x
Use
Other
$0.00
Total Revenue
205 + x
$89,200+(X*800)

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

Brake Even 196.78


Point 197.00 Commercial Hours

FC

$183,256.00

Price1

$800.00

Price2

$400.00

VC

$139.80

Hours1

Hours2

205.00

Future Options:

Alter Pricing Models

Alter Operations

Increase Promotional Efforts

Increase price to commercial


customers 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
Revenues
Intercompany Sales
Commercial Hours
Commercial Sales
Other
Total Revenue
Costs
Variable Costs
Fixed Costs
Total Costs
Net Profit (Loss)

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
$

Reduce price to commercial


customers to $600 per hour.
Demand increased by 30%.

Decrease Price to commercial users to $600 per hour


30% increase in demand for commercial users
Revenues
Intercompany Sales
Commercial Hours
Commercial Sales
Other
Total Revenue
Costs
Variable Costs
Fixed Costs
Total Costs

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

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


$ 183,444.00 $ 183,379.00 $ 183,256.00 $ 550,079.00
$ 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)

Increased promotions yield


30% higher sales.
Increase promotion
Increase sales 30%
Revenues
Intercompany Sales
Commercial Hours
Commercial Sales
Other
Total Revenue
Costs
Variable Costs
Promotion
Increase promotion
Fixed Costs
Total Costs
Net Profit (Loss)

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

$ 45,565.94 $ 45,546.20 $ 48,255.51 $ 139,367.64


$ 7,909.00 $ 7,039.00 $ 8,083.00 $ 23,031.00
no
no
$ 6,290.49 $
6,290.49
$ 183,444.00 $ 183,379.00 $ 183,256.00 $ 550,079.00
$ 236,918.94 $ 235,964.20 $ 245,885.00 $ 718,768.13
$ (17,277.94) $ (13,580.20) $

0.00 $ (30,858.13)

Reduce operations to 16 hours on


weekdays and 8 hours on
Saturdays. Lose 20% of commercial
hours.
Change working hours
Decrease demand by 20%
January
Revenues
Intercompany Sales
Commercial Hours
Commercial Sales
Other
Total Revenue
Costs
Variable Costs
New Variable Costs
Fixed Costs
Total Costs
Net Profit (Loss)

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

Proposal to Board of Directors


Total Revenue
$ 272,441.00
Total Variable Costs
$ 48,069.00
Total Fixed Costs
$ 183,444.00
Net Profit
$ 40,928.00

$ 261,984.00
$ 46,546.00
$ 183,379.00
$ 32,059.00

$ 301,485.00
$ 50,467.00
$ 183,256.00
$ 67,762.00

Difference in Intercompany Revenue


Old Way
$ 82,400.00
New Way
$ 164,800.00
Difference
$ (82,400.00)

$ 72,400.00
$ 144,800.00
$ (72,400.00)

$ 89,200.00
$ 178,400.00
$ (89,200.00)

This means that Prestige Thelephone company is making a profit


out of Prestige Data Services by not allowing them to charge full
price for their services, being their biggest client and consuming
the majority of the hours.

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