Table of Content
Executive Summary 1
Appendix A- Summary of Computer Utilization 5
Appendix B- Summary Results of Operations, First Quarter 2004 6
Appendix C- Variable and Fixed Cost in respect to revenue hours 7
Appendix D- Breakdown of Variable Cost per Hour Usage 8
Appendix E- Contribution Margin Income Statement, March 2004 9
Appendix F- Contribution Margin Ratios 11
Appendix G- Break-even Analysis 12
Appendix H- “What if” Analysis 13
Since 2001, Salem Data Services has been operating at a net loss. After review the reports from first quarter 2004, it has become apparent that action will be necessary.
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We recommend the following actions to assist Salem Data Services in reaching full potential towards profitability:
• Re-evaluation of the market to determine a more accurate demand for usage hours.
• Convert Sales & Promotions from a Fixed Cost to a Variable cost and have this cost tied to current levels of work produced.
• Increase the usage hours for Commercial Sales to reach a minimum break-even level to avoid further and future losses of Salem Data Services.
Salem Telephone Company decided to create a computer data subsidiary, Salem Data Services, which began operations in 2001. The Salem Telephone company decided to request permission from the state Public Service Commission (PSC) to create an unregulated subsidiary with anticipation it will generate enough profit to reduce the pressure for a telephone rate increase. The PSC approved the proposal and placed one stipulation that Salem Telephone Company not exceed and average service charge from Salem Data Service of $82,000. As with most companies, delays and start-up cost were exceeded but by 2003, the majority of these problems were resolved. As of April 2004 Salem Data Service has been unable to generate a profitable month and it is apparent that action is necessary to reduce the drain on the parent company Salem Telephone Company.
On the surface Salem Data Services faces three key areas of concern.
• Utilization of computer usage hours- For the pass three months that Salem Data Services is experiencing a sales deficit of computer usage hours. On average 219 hours per month or 40% of available hours go unused.
• Results of operation are not profitable- For the pass three months result of operation have been trending upward, toward profit but the average lost was $35,327. It is unclear the contributions, negative and positive of each revenue center (Intra-Company and Commercial Sales). In addition, there is some ambiguity in the cost allocation to Salem Telephone Company in regards to rent, wages and salaries, and corporate services
• Sales promotion is not tied to current levels of work- The sale promotion budget is tied to the amount estimated to acquire new client. Management suggests that theses level may warrant an increase.
Salem Data Services needs to make a determination if the company is salvageable to fulfill its intention of producing profit to reduce the pressure for the telephone rate increases. Through the analysis of this company we plan to drive deeper into the three key areas to maximize the potential profit by evaluating usage, expenditures and resource allocation to determine if the subsidiary will need to be closed down, sold, or revitalized.
In reviewing Salem Data Services Summary of Computer Utilization (Appendix A), we are able to determine that Salem Data Services are averaging 60% or 132 hours computer utilization. Coupled with the Results of Operations (Appendix B) Salem Data Services...