salem phone company

Salem Telephone Company

Fixed and Variable Expenses Fixed

Variable

1. Space Costs • Rent • Custodial Services 2. Equipment Costs • Computer Leases • Maintenance • Depreciation  Computer Equipment  Office Equipment and Fixtures 3. Wages and Salaries • Operations: Salaried Staff • Systems Development and Maintenance • Administration • Sales 4. Sales Promotions 5. Corporate Services

1. Equipment Costs • Power 2. Wages and Salaries • Operations: Hourly Personnel

Cost per Revenue hour for Variable

Expenses January

February

March

Total Revenue Hours

329

316

361

Total Power

1546

1485

1697

Operations: Hourly Personnel

7896

7584

8664

Cost of Power/ Hour

4.699

4.699

4.701

Hourly Personnel cost/ Hour

24

24

24

Contribution Margin Income Statement • Contribution Margin is the difference between total revenue and variable expense • Net operating income is obtained by subtracting total fixed expenses from the contribution margin • Total Revenue is $192400 • Contribution Margin is $ 182555.90 • Net Operating Income is $(30383.10)

Breakeven • Break-even Quantity = Net fixed Expenses / (Price – Variable Cost per unit) • Net fixed expenses = Total fixed expenses – Contribution Margin • Variable Cost per unit is the sum of variable cost due to power and hourly personnel • Break-even hours = 177.39 ~ 178 hours

Scenario 1 • Increasing the price to $1000 hours would reduce demand by 30% • Commercial sales hours reduces to 97 • Resulting in o Total revenue of $179000 o Contribution Margin $170332 o Net Operating Income $(42606.40)

Scenario 2 • Reducing the price to $600 hours would increase demand by 30% • Commercial sales hours increases 180 • Resulting in – Total revenue of $190000 – Contribution Margin $178950.50 – Net Operating Income $(33988.50)

Scenario 3 • Increased promotion resulting in additional revenue hours of 30% • Commercial sales hours increases 180 • Resulting in – Total revenue of $226000 – Contribution Margin $214950.50 – Net Operating Income $2011.50

Recommendations • Scenario 3 in which promotion is increased is the only option fetching profit • But there is no mention of the increased cost of promotion o Maximum possible increase in promotion can be $2011.50(Break-even)

• The above calculations are not showing the cost the telephone company is saving because of subsidized rate by SDS

Thank you