Case Summary Salem Telephone Company, a regulated utility, received permission from the state Public Service Commission to establish Salem Data Services. Salem Data Services would provide data processing services for the telephone company as well as outside companies. Unlike Salem Telephone, Salem Data Services would not be a regulated utility and would be considered a separate entity. While the intention would be that the profit from Salem Data would ease pressures to raise telephone prices, the company had yet to produce a single profitable month. Finally, a meeting took place between Salem Telephone President and the manager of Salem Data Services to discuss the future of Salem Data Services (Bruns & Hertenstein, 2005).
Case Tasks …show more content…
As illustrated above, the company has extremely large fixed costs which are the main contributor to its net income result.
Break-Even Analysis
Assuming that intracompany hours are 205, the following is an analysis to determine the number of commercial revenue hours needed to break-even.
The following formula was used: Revenue = Variable + Fixed Costs $400(205) + x($800) = (x+205)($28.70) + $212,636.67 $82,000 + $800x = $28.70x + $5883.50 + $212,636.67 $82,000 + $800x = $28.70x + $218,520.17 $771.30x = $136,520.17 x = 177.00 hours needed to break-even

Effects on Income
Three options were analyzed to determine their effects on net income using the following formula: Net Income = SP(x) - VC(x) – TFC
Note: Intracompany demand remains at 205 hours
Option 1: Increase the price to commercial customers to $1,000 per hour which would decrease demand 30%
Net Income = $400(205) + $1000(96.6) - 301.6($28.70) - $212,636.67
Net