Now that local phone service in the United States is open to competition, some telephone service providers have begun purchasing individual phone services at a discount from the traditional phone companies and reselling them to customers who have been denied service because of poor credit. (College students represent a large group of customers of the resold services.)

Ema Miille is considering starting such a nontraditional phone service company in Houston, Texas.

The current competitive price in the area is $40 per month, and she currently generates a 20 percent

(pretax) return on sales in her other businesses. She expects a turnover of 10 percent per month (10 percent of customers will leave to be replaced by an equal number of new customers). She has estimated the following activities as necessary to operate the business for an estimated 1,000 customers.

Activity 3 Cost Advertising and promotion $ 400 per month Bill collecting 960 per month Service installation 45 per new customer Credit analysis 25 per new customer Phone service purchase from AT&T 20 per customer per month Building occupancy ~ 1,000 per month Equipment utilization 300 per month Invoicing and billing 3 per customer per month ~ Business planning and analysis 1,600 per month Required Form small groups to respond to the following items.

a. Is this proposed business expected to meet Miille’s financial goal of achieving a 20 percent return on sales? What, if any, cost reductions are necessary?

b. Prepare a short presentation outlining process improvements you would recommend to make the business more profitable.