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Salem Telephone Company Case Analysis

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Introduction Peter Flores, president of Salem Telephone Company (STC) informed the Public Service Commission “that a profitable computer service Subsidiary would reduce pressure for the telephone rate increase.” And a result, Salem Data Services (SDS) was established. In 2003, SDS has “yet to experience a profitable month” and this induced the meeting between Peter Flores and Cynthia Wu, manager of SDS in April 2004. Flores and Wu held different views in regards to SDS; Flores felt SDS was draining STC resources and is questioning the ability of SDS to be a profitable business. Wu felt that SDS had the ability to show profits in the near future. To adequately prepare Flores, president of STC for his meeting with Wu, he assigns a task to …show more content…

Question 5 Moving on, we examine the suggestions that Peter Flores has made to Ms. Wu. The three options he has suggested are: 1) Increasing commercial prices to $1,000 per hour believing that demand would be reduced by 30% 2) Reducing commercial prices to $600 hoping to increase demand by 30% 3) Increasing promotion in order to increase revenue hours up to 30% Option 1: We pull 138 commercial revenue hours from March Exhibit 1. Multiplying that by 70%, we come up with 97 hours. Commercial Revenue Hours = 138 hours x (1-0.3) = 97 hours Using the intercompany-billing rate per hour of $400 and the intercompany demand of 205 hours we calculate revenue and expenses. Revenue: (205 hours x $400) + (97 hours x $1,000) = $82,000 + $97,000 = $179,000 Expenses: $28.70(variable cost) x (205 hours + 97 hours) = $8,667.40 Subtracting expenses from Revenue yields a net income of $170,332.60 Change in net income = $170,332.60 – $212,939 = -$42,606 Option 2: We pull 138 commercial revenue hours from March Exhibit 1. Multiplying that by 130%, we come up with 180 hours. New revenue hours = 138 hours x (1+0.3) = 180 hours Revenue = (205 hours x $400) + (180 hours x $600) = $82,000 + $108,000 = $190,000 Expenses = $28.70(variable cost) x (205 hours + 180 hours) = $11,049.50 Subtracting expenses from Revenue yields a net income of $178,950.50

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