prestige telephone compny

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Accounting for Decision Making (GSM5301)

Case Study Report 6

Prestige Telephone Company

GROUP 4 :

LECTURER : Dr. Ahmed Razman
HAND IN DATE : 26 March 2014

1.0 INTRODUCTION
2.0 Prestige Data Services is a subsidiary of Prestige Telephone Company, designed to perform data processing for the telephone company and selling computer services to other organizations. The subsidiary started operations in 1995 and has yet to experience a profitable month. Worse, its income was low enough to necessitate a report to shareholders by the end of 1996. Although Rowe was discouraged by results to date, he was reluctant to suggest to Bradley that Prestige Data Services be closed down or sold.
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& Maintenance salaries + Administration salaries + Sales salaries + Sales promotion expenses + Corporate services
26.0 $(9,240 + 95,000 + 5,400 + 26,180 + 109.91 + 21,600 + 12,000 + 9,000 + 11,200 + 8,000 + 15,000)
27.0 = $212,729.91
28.0 The variable costs that are recognized in this case study are power ($4.69 per hour), part of the operations wages ($24 per hour), and materials costs ($27.91 per hour). Total variable cost per hour is equal to $56.60 per hour.
29.0 Breakeven Hours =
30.0 (Total Fixed Costs) – (Allowed Costs After Variable Costs of Intercompany Operations)
31.0
32.0 Contribution per Hour
33.0
34.0
35.0 Breakeven Hours =
36.0
37.0 =
38.0 =
39.0 ($212,729.91) – [$82,000 – (205 hours x $56.60)]
40.0
41.0 ($800.00 - $56.60)
42.0 142,332.91/743.40
43.0 191.46 hours
44.0
45.0 Conclusion:
46.0 191.46 hours at $800 per hour is equal to $153,168 of commercial revenue per month. Prestige Data Services has to achieve the commercial sales of $153,168 of computer use in order to achieve breakeven each month.
47.0
48.0
49.0
50.0 Question 3: Estimate the effect on income of each of the operations Rowe has suggested if Bradley estimates as follows:
51.0 Default Contribution Margin Model (based on Solution 2):
52.0
53.0 Per hour
54.0 Volume (hours)
55.0 Total
56.0 %
57.0 Revenue
58.0 $800.00
59.0
60.0
61.0
62.0 Variable expenses
63.0 ($56.60)
64.0
65.0
66.0
67.0 Contribution margin
68.0 $743.40
69.0 x

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