0115 966 7955 Today's Opening Times 10:00 - 20:00 (BST)
Place an Order
Instant price

Struggling with your work?

Get it right the first time & learn smarter today

Place an Order
Banner ad for Viper plagiarism checker

Extent of competition in the banking industry

Disclaimer: This work has been submitted by a student. This is not an example of the work written by our professional academic writers. You can view samples of our professional work here.

Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of UK Essays.

Published: Mon, 24 Apr 2017

Corporate services — fixed cost

Hourly personnel is a variable cost because the cost is dependent upon how many revenue hours are worked by the staff. If they sell for 0 hours, there is still a rent expense.

Power is a variable cost because the cost is directly related to the number of hours computers were used in operation. The more hours used, the higher the cost of power.

Rent is a fixed cost because it must be paid no matter how many hours the company is operating. Rent must be paid whether the company is selling or not.

Custodial services is a fixed cost because it is based on Salem Telephone’s estimated annual cost per square foot. It is not dependent on the amount of revenue hours.

Computer leases is a fixed cost because it is independent of revenue hours. This cost will stay the same regardless of the amount of revenue hours.

Maintenance is a fixed cost because it is not dependent on the number of revenue hours.

Depreciation on computer equipment does not depend on the amount of revenue hours.

Depreciation on office equipment is not dependent upon revenue hours.

Salaried staff is paid a salary regardless of the amount of revenue hours. The amount the staff is paid is not affected by a change in revenue hours.

System maintenance is not dependant on the hours of selling

Administration salary is not related to the amount of revenue hours.

Sales wages does not depend on the amount of revenue hours.

Sales promotion does not vary with a change in revenue hours.

Corporate services is a fixed cost because the amount is not dependent upon the number of revenue hours.

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

Power cost per revenue hour:

January: $1,546/329 hours = $4.70

February: $1,485/316 hours = $4.70

March: $1,679/361 hours = $4.70

Operations: hourly personnel:

January: $7,896/329 hours = $24.00

February: $7,584/316 hours = $24.00

March: $8,664/361 hours = $24.00

Variable costs in total change in direct proportion to changes in volume of activity but remains constant per unit when the volume of activity changes.

Create a contribution margin income state for Salem Data Services. Assume that intracompany usage is 205 hours. Assume commercial usage is at the March level.

**See Exhibit 1

Assuming the intracompany demand for service will average 205 hours per month, what level of commercial revenue hours of computer use would be necessary to break even each month?

Break-even point = Fixed costs/ CM per unit

Sales revenue per unit = $82,000/205= $400.00

Variable cost per unit = $9,844.10/343= $28.70

(205 x $400 + A x $800) – 28.70 x (205 + A) – 212,939 = 0

82,000 + 800A – 28.70A – 5883.50 – 212,939 = 0

-136,822.50 + 771.30A = 0

771.30 A = 136,882.50

A = 177.39

Salem Data Services would need 177.39 commercial hours to break even.

Estimate the following effect on income of each of the options Floes has suggested if Wu estimates as follows:

Increasing the price to commercial customers to $1,000 per hour would reduce demand by 30%.

Commercial revenue hours = 138

With a 30% decrease in demand, commercial revenue hours would be reduced to:

138 x 30% = 41.4

138 – 41.4 = 96.6 hours

Revenue

Intracompany sales (205x$400) $82,000

Commercial sales (96.6x$1,000) 96,600

Less: VC (301.60×28.70) (8,655.92)

CM 169,944.08

Less: FC (212,939)

Net Income ($42,994.92)

This option would result in an additional loss of ($12,611.92) leaving a total net loss of ($42,994.92).

Reducing the price to commercial customers to $600 per hour would increase demand by 30%

Commercial revenue hours = 138

With a 30% increase in demand, commercial revenue hours would increase to:

138 x 30% = 41.4

138 + 41.4 = 179.4 hours

Revenue

Intracompany sales (205x$400) $82,000

Commercial sales (179.4x$600) 107,640

Less: VC (384.4x$28.70) (11,032.28)

CM 178,607.72

Less: FC (212,939)

Net Income ($34,331.28)

This option would result in an additional loss of ($3,948.28) resulting in a total net loss of ($34,331.28).

Increased promotion would increase revenue hours by up to 30%. Wu is unsure how much promotion this would take. (How much could be spent and still leave Salem Data Services with no reported loss each month if commercial hours were increased 30%?)

Commercial revenue hours = 138

Commercial revenue hours with a 30% increase =

138 x 30% = 41.4

138 + 41.4 = 179.4 hours

Revenue

Intracompany sales (205x$400) $82,000

Commercial sales (179.4x$800) 143,520

Less: VC (384.4x$28.70) (11,032.28)

CM 214,487.72

Less: FC (212,939)

Net Income $1,548.72

The maximum amount that could be spent and still leaves Salem Data Services with no reported loss each month if commercial hours were increased 30% would be $1,548.72. Salem Data Services spent $8,083 on sales promotion in March. Therefore, a total of $9,631.72 ($1,548.72+$8,083) could be spent on sales promotion without incurring a net loss.

Based on your analysis above, is Salem Data Services really a problem to Salem Telephone Company? What should Flores do about Salem Data Services?

Based on our analysis above, we feel that Salem Telephone Company should keep Salem Data Services. Although Salem Data Services’ fixed costs are very high and profits have not been obtained in previous periods, Salem Telephone Company should maintain Salem Data Services. Exhibit 2 shows that the net loss from February to March decreased $16,987. If Salem Telephone Company were to shut down Salem Data Services, the company would save a large amount of money in fixed costs but would have to spend money to make up for the intracompany revenue hours.

Salem should keep Salem Data Services in operations, regardless of showing a net loss. If Data Services closed, Salem would incur the following additional costs:

Purchase of intracompany hours (at market cost): 205 hours x $800 = $164,000

Fixed costs saved if SDS closed (March):

Rent $8,000

Custodial services $1,240

Maintenance $5,400

Power $1,697

Operations: salaried staff $21,600

Operations: hourly personnel $8,664

Systems development $12,000

Administration $9,000

Sales $11,200

Promotions $8,083

Total savings $86,884

(205 hours x $800) $164,000 – Purchase of intracompany hours

($86,884) – Savings if Salem Data Services closed

$77,116 – Cost savings for operating Salem Data Services

In this situation, the benefits outweigh the costs. Salem Telephone Company would be saving $86,884 in costs but would have to purchase intracompany hours at $164,000.

Flores should continue to operate Salem Data Services; however, they should focus on methods to cut costs by re-evaluating its labor necessities and increasing awareness through promotion to increase long-term profitability. Another aspect for Flores to take into consideration is to re-evaluate and forecast commercial sales willingness to pay in order to increase its break-even potential. From the analysis in question five, Flores could reduce the price to commercial customers, thereby increasing demand. Using this strategy in addition to cutting costs will increase Salem Data Services profitability.


To export a reference to this article please select a referencing stye below:

Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.

Request Removal

If you are the original writer of this essay and no longer wish to have the essay published on the UK Essays website then please click on the link below to request removal:


More from UK Essays