ACCT500_ET - MANAGERIAL DECISION SUPPORT
Salem Telephone Company

In this case, the fixed expenses with respect to revenue hours are the following:
Custodial services
Rent
Computer leases
Maintenance
Depreciation of computer equipment, office equipment and fixtures
Operations salaried staff
Systems development and maintenance
Sales promotions
Corporate services
Sales
Sales Promotion
Administration
These are fixed costs because the cost driver revenue hours doesn’t impact them (for instance the rent price stay the same even if there is no sales). But for power expense it has an impact. It is a variable expense with respect to revenue hours as it depends how much the company use electricity and how many time the computers have worked. The hourly personnel salaries expense are also a variable expense with respect to revenue hours as it depends how many hours the staff has worked.
To calculate our cost revenue per hour with have first to calculate the cost per hour of each variable costs for each month:
For January, the power cost will be: $1,546 / 329 = $4.70 the hourly personnel cost will be: $7,896 / 329 = $24.00
For February, the power cost will be: $1,485 / 316 = $4.70 the hourly personnel cost will be: $7,584 / 316 = $24.00
For March, the power cost will be: $1,679 / 361 = $4.70 the hourly personnel cost will be: $8,664 / 361 = $24.00
By those results we can deduct that the cost per revenue hour of the variable costs is:
4.70 + 24 = $28.7 per hour
In the case we saw that intracompany work was billed at $400 per hour, and the commercial sales were billed at $800 per hour. Thanks to those number we are able to calculate our contribution margin and our commercial contribution margin:
Contribution margin: 400 - 28.7 = $371.3 per hour
Commercial contribution margin: 800 - 28.7 = $771.3 per hour
Those results permit us to create an income statement for Salem Data Services assuming that intracompany usage is 205 hours and that commercial usage is at the March level.
Income Statement of Salem Data Service for March 2004
Calculations
Intracompany
82,000
205*400
Commercial
110,400
138*800
Revenues
$192,400

Variable Cost
$9,844.1
1200*28.7
Contribution margin
$182,555.9
Revenues – Variable cost
Rent
$8,000

Custodial services
$1,240

Computer leases
$95,000

Maintenance
$5,400

Depreciation
$26,180

Salaried staff
$21,600

System development
$12,000

Administration
$9,000

Sales
$11,200

Sales promotion
$8,083

Corporate services
$15,236

Fixed Costs
$212,939

Net Loss
$30,383.1
Contribution margin – Fixed costs

Our net loss is $30,383.1 so let’s try to see the number of commercial sales we need at minimum in order to have no loss, knowing that the maximum number of hours for intracompany sales is already reached. Revenue = variable costs + fixed costs
205 * 400 + x * 800 = (205 +x)*28.7 + 212,939
X = 177.39
So our commercial revenue hours sold to break-even is $177.39
Knowing our break-even point is $177.39 and that we have a net loss several hypothesis will be test below in order to solve our problem:
I. By increasing the price to commercial customers to $1,000 per hour would reduce demand by 30%.
We have a commercial revenue hours of 138. If we apply a 30% decrease in demand, our new commercial revenue hours will be: 138 x 30% = 41.4
The difference between both would be 138 – 41.4 = 96.6 hours
Revenue

Calculation
Intracompany sales
$82,000
205*400
Commercial sales
$96,600
96.6*1000
Variable costs
$8,655.92
301.60*28.70
Contribution Margin
$169,944.08

Fixed Costs
$212,939

Net loss
$42,994.92

If we compare the loss of March with this loss, it will lead to an additional loss of:
42,994.92 – 23,700 = $12,611.92
II. By reducing the price to commercial customers to $600 per hour would increase demand by 30%.
We have a commercial revenue hours of 138. If we apply a 30% increase in demand, our new commercial revenue hours will be: 138 x 30% =