Case study: Salem Telephone Company

By: WILLIAM J. BRUNS, JR. and JULIE HERTENSTEIN

Answer the following:

1. "Revenue hours" represent the key activity that drives costs at Salem Data Services. Which expenses in Exhibit 2 are variable with respect to revenue hours? Which expenses are fixed with respect to revenue hours? Which expenses are semi-variable (mixed) with respect to revenue hours? Please explain your classification.
2. Develop formulas to express the cost behavior for each cost item.
   1. .For each expense that is variable with respect to revenue hours, calculate the cost per revenue hour.
   2. For each expense that is semi-variable with respect to revenue hours, calculate the cost per revenue hour for the variable component of the expense.
   3. Estimate the fixed cost per month.
3. Assuming the company demand for service will average 205 hours per month, what level of commercial revenue hours of computer use would be necessary to break even each month?
4. Assuming the company demand for service will average 205 hours per month, what level of commercial revenue hours of computer use would be necessary to make $10,000 each month?
5. what is a contribution margin income statement for Salem Data Services. Assume that the intra-company usage is 205 hours. Assume commercial usage is at the March level.
6. Estimate the effect on income of each of the options Flores has suggested if Wu estimates as follows:
   1. Increasing the price to commercial customers to$1,200 per hour would reduce demand by 40%.
   2. Reducing the price to commercial customers to$700 per hour would increase demand by 10%
   3. Increased promotion would increase sales by up to 25%. Wu is unsure how much promotion this would take. (How much could be spent and still leave Salem Data Services with no reported loss each month if commercial hours were increased 25%?)
   4. Reducing operations to 16 hours on weekdays and eight hours on Saturdays would result in a loss of 20% of commercial revenue hours.
7. Appraise the results of operations of Salem Data Services. Is the subsidiary really a problem to Salem Telephone Company? Please identify cost relevant for decision that Flores and Wu are considering. Consider carefully the differences between reported costs and relevant costs.
8. Can you suggest changes in the accounting and reporting system now used for operations of Salem Data Services which would result in more useful information for Flores and Wu?