Matt

Moench Managerial Accounting, Section C 1/22/2012

Please, submit your homework before 8:30am on Blackboard in pdf format.

Homework for Session 3 Due January 23 1. Revenue hours represent the key activity that drives cost at Salem Data Services. Which expenses in Exhibit 2 are variable with respect to revenue hours? Which expenses are fixed with respect to revenue hours? Fixed costs are costs incurred no matter what number of revenue hours produced. They are the following: Space Costs o Rent o Custodial services Equipment costs o Computer leases o Maintenance o Depreciation Wages and salaries o Operations: salaried staff o Systems development and maintenance o Administration o Sales Sales promotion Corporate services

Variable costs are expenses that are incurred in proportion to revenue hours. They are the following: Equipment costs o Power Wages and salaries o Operations: hourly personnel

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

 Total cost / revenue hours = cost per revenue hour. 3. Create a contribution margin income statement for Salem Data Services. Assume that intracompany usage is 205 hours. Assume commercial usage is at the March level.

 4. 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? Considering intracompany hours will average 205 hours per month, we can adjust the commercial hours up until we reach a value which generates enough revenue to account for the total cost 82000 (intracompany revenues). Based on the model I built for #3, the breakeven point is reached with 178 commercial hours.

5. Estimate the effect on income of each of the options Flores has suggested if Wu estimates as follows:

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

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

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%?)

6. Based on your analysis above, is Salem Data Services really a problem to Salem Telephone Company? What should Flores do about Salem Data Services? My analysis states that the first and second scenarios suggested by Wu would still result in a loss. The third scenario however is plausible but it depends on how much extra sales promotion is required to gain the full 30% increase in commercial demand. We are dealing with a $1,549 budget to gain that additional 30%. If for example the 30% is gained by spending half that, the other half will be gained as Net Operating Income. However, say the 30% increase requires more than $1,549, we will again be operating at a loss. Flores should find at what level of increased Sales promotion which will grant the 30% of increased demand. He should also consider incentivizing his sales team with commission or other alternative methods to increase demand at the current price levels.