Managerial Accounting for Decision Making 7310
Case #2
Salem Telephone Company
Hubert Beauchemin, Lingzhou Bu, Haozhao Zhang

With operations starting in 2001, Salem Data Services was seen as a window of opportunity for
Salem Telephone Company. However, many problems have been encountered along the way. The most recent results have been so concerning that President Peter Flores has had to discuss solutions with
Manager Cynthia Wu. The most pressing issue they must discuss are the unsustainable high fixed costs and the high salary wages given to employees. The way Salem Data Services is set up, they have revenue hours for intra­company and commercial. The intra­company hours are only bringing in revenues of $400/hr, whereas the commercial hours are bringing in revenues of $800/hr. No doubt, the price for intra­company revenue hours are set up at a severe disadvantage for Salem Data Services.
The only variable expenses with respect to “revenue hours” are power and hourly wages for personnel. And the fixed expensed in Exhibit 2 are rent, custodial services, computer leases, administration, sales, salaried wages for personnel, depreciation, systems development and maintenance, sales promotion and corporate services. The reason why power and hourly wages for personnel are variable costs is because they are increasing with the number of revenue hours. However, rent, custodial services, computer leases, administration, sales, salaried wages for personnel, depreciation, systems development and maintenance are constant over time. In other words, all these costs are fixed. Sales promotion and corporate services are not changing based on the number of revenue hours even though they do slightly change over time, so both are also included in the fixed expenses category. Figure 1

January

February

March

Power

4.7

4.7

4.7

Hourly Wages

24

24

24

Total

28.7

28.7

28.7

Knowing the variable expenses that exist for Salem Data Services, we were able to calculate total variable expenses for the months of January, February, March. Figure 1 shows the calculation of cost per revenue hour for each variable expenses. We used total expense for each categories in different months (from Exhibit 2) divided by the total revenue hours for that month (from Exhibit 1) and obtained cost per revenue hour. For example, the total Power expense in January is $1,546 and the total revenue hours for January is 329 hours, we divided $1,546 by 329 hours and got $4.7 per hour. We found out that cost per hour in each month are the same with respect to both variable expense categories. We added the power and hourly wages expenses together to get the total of 28.7, the same across January, February and March. This calculation was essential in helping us access the income statement and contribution margin.

Figure 2
CM Income Statement

(using 205hrs intra­company, 138hrs for commercial)

Revenues

$82,000 + $100,400 = $192,400

Variable Costs

$5,883.5 + $3,960.6 = $9,844.1

Contribution Margin

$182,555.9

Fixed Costs

$223,300 ­ $8,664 ­$1,697 = $212,939

Net Income/ Loss

($30,383.1)

Being able to now calculate the variable costs (due to the $28.7 number calculated in Figure 1),
Figure 2 shows the income statement using contribution margin. The case listed the intracompany revenue per hour as $400 and commercial revenue per hour as $800. Given that intracompany usage is
205 hours and commercial usage is 138 hours (March level), we can calculate the total revenue. The total variable cost was derived by using the numbers of hours for intracompany usage and commercial usage times the variable cost per hour, $28.7. Contribution margin is simply the difference between total revenue and variable costs. We figured out the amount of fixed cost from the total costs in March by subtracting the known variable costs amounts of $1,697 (from power) and $ $8,664 (fom hourly