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Computer and Salem Data Services

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For the exclusive use of R. Ortega

9-104-086
REV: NOVEMBER 1, 2005

WILLIAM J. BRUNS, JR.
JULIE HERTENSTEIN

Salem Telephone Company
In April 2004, Peter Flores, president of Salem Telephone Company, was preparing for a meeting with Cynthia Wu, manager of Salem Data Services. An agreement with the state Public Service
Commission had permitted Salem Telephone to establish Salem Data Services, a computer data service subsidiary, to perform data processing for the telephone company and to sell computer service to other companies and organizations. It was necessary for these two companies to be separate because Salem Telephone was a regulated utility, and Salem Data Services was an unregulated company. Flores had told the …show more content…

Intracompany work was billed at $400 per hour, a rate based on usage estimates for 2001 and the Public Service Commission’s restrictions that cost to Salem Telephone should not exceed an average of $82,000 per month. Commercial sales were billed at $800 per hour.
While most expenses summarized in the report were self-explanatory, Flores reminded himself of the characteristics of a few. Space costs were all paid to Salem Telephone. Salem Data Services rented the ground floor of a central exchange building owned by Salem Telephone for $8,000 per month. In addition, Salem Data Services paid a charge for custodial service based on Salem Telephone’s estimated annual cost per square foot, as telephone personnel provided these services.
Computer equipment had been acquired by lease and by purchases; leases had four years to run and were noncancelable. Owned equipment was all salable but probably could not bring more than its book value in the used-equipment market.
Wages and salaries were separated in the report to show the expense of five different kinds of activities. Operations salaries included those of the six people necessary to run the center around the clock; in addition there were operations wages paid hourly workers who were required when the computer was in operation. Salaries of the programming staff that provided service to clients and maintained the operating system were reported as system

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