Billot Telephone was formed in the 1940s to bring telephone services to remote areas of the US Midwest. The early equipment was quite primitive by today's standards. All call were handled manually by operators, and all customers were on party lines. By the 1970's, however, all customers were on private lines, ad mechanical switching devices handled routine local and long distance calls. Operators remained available for directory assistance, credit card calls and emergencies. In the 1990s Billot Telephone add local internet connections as an optional service to its regular customers. It also established an optional cellular service, identified as Home Ranger.
Billot's 1940s cost function was $2,000,000 + $15 (per thousand customers). In the 1990s, the cost function is $5,000,000 + $7 (per thousand customers). Average revenue per customer has remained unchanged. All in current dollars, ignore any inflation impact.
1. Using a unit level analysis, develop a graph with two lines representing Billot's cost structure. Be sure to label the axes and lines:
a. In the 1940s
b. In the late 1990s
2. What is the likely impact of the changed cost structure on Billot's contribution margin ratio?
3. Assume Billot's net income has remained relatively flat. Discuss how the change in the cost structure affected Billot's operating leverage and how this affects profitability under rising or falling sales scenarios.
4. Provide 3 specific managerial decisions that can have an impact on the degree of operating leverage of a firm?