Prestige Telephone Company Essay

2709 Words Feb 16th, 2011 11 Pages
Case Analysis: Prestige Telephone Company

Liam Hennessy, Xinyi Zhang, Yuan Chai, and Anthony Saba

1. Reasons for Continuing Losses
Prestige Data Services’ main problem is that they have too many available hours that are not generating any revenue. In the first quarter of 2003, they have an average of 176 available hours per month of available hours. Its operations exact a huge amount of fixed costs to cover. If they could find more commercial customers for the available capacity, they could increase their commercial sales revenue by as much as $140,880 (176*800). In addition, they are also creating unnecessary expenses by having to pay all kinds of expenses during these unprofitable hours.

2. Breakeven Point of Commercial Sales
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Suppose commercial revenue hours were increased by 30% from March’s performance, then b = 138*130%= 179.4 hours; and since average intercompany hours (a) cannot exceed 205 (82,000/400), then:

Net income (loss) = 1.055(82,000+800*179.4)-85.8(205 + 179.4) -203,070=$ 1,872

Thus, the amount of $1,872 could be spent on promotion and still leave the company with no reported loss each month if commercial hours were to increase 30%.

Option # d: Reducing operations to 16hours on weekdays and eight hours on Saturdays would result in a loss of 20% of commercial revenue hours.

In this option, b will be replaced by 0.8b, then:
Net income (loss) = 1.055(400a+640b)-85.8(a + 0.8b) -203,070=336.2a+606.56b-203,070

Option # d will cause the net income to go down.

3. A Contributor or a Burden

After appraising the results of operations for Prestige Data Services, we find it evident that the subsidiary is not a problem to Prestige Telephone Company and it is actually producing an income for its parent company. Some of the reported costs are only reporting cost for accounting purposes and are irrelevant to the results of its operations. For example, if Prestige Data Services were to be closed down, Prestige Telephone would lose the $8,000/month from the rent that the subsidiary is charged. They would also have to advertise the space and hope that they could rent it. Given the fact that there is a lot of empty office space available

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