Salem Telephone Co Case Solution

Case Solution

Your Personal Computer subsidiary appears being unprofitable. Managers must see whether it is unprofitable and consider whether modifications in prices or promotion might improve profitability. Allows apparent separation of variable costs from fixed costs. A rewritten type of a young case.

Excel Calculations

Caculating Variable Costs per Revenue Hour

Calculating Contribution Margin

Calculating Current Net Income

Calculating Break Even using Goal Seek

Maximum amount that can be spent on Sales Promotion while keeping net income above zero

Total Costs of Closing SDS

Total Expenses Saved of closing SDS

Calculation of Percentage unused hours

Questions Covered

1. Which costs of Salem Data Services are fixed and which are variable?  Make a list of each.

2. For each expense that is variable with respect to revenue hours, calculate the variable cost per revenue hour.

3. Compute a contribution margin per hour of revenue using 205 hours of intra-company usage plus commercial usage at the March level.  Based on this analysis, how many commercial hours does Salem Data need to sell in order to finally break even?

4. On page 3 of the case, look at question 5 and compute the effect on income of each of the options that Flores is suggesting to Wu as possible strategic alternatives.

5. Is Salem Data Services really a problem to Flores and Salem Telephone Company?  Should Flores insist on any of the suggested options or just be more patient for Salem Data Services to get into the black?