Salem Telephone operates as a regulated public enterprise. The company has specialized in providing computer services to the other companies at a profit through its wholly established subsidiary which the company has set up with the permission of Public Service Commission. A separate subsidiary was established by Salem Telephone so that the company does not have to raise the rates and Sales Data Services could easily sell its services based on its business model. However, the issue that was now being faced by the subsidiary was that it was not proving to be profitable at all. Therefore, the owner of the company, Mr. Flores wants the manager of Salem data to take certain actions in order to turn the subsidiary from loss making to a profit making subsidiary.
Â Â Â Â Â Â Â Â Â Â Â The cost of power per revenue hour for Salem Data Services is $ 4.7 and $ 24 for hourly cost of personnel per revenue. Therefore, the total variable cost per hour for the company is $ 28.70. Apart from these costs, all the other costs are fixed. Based on this information and the assumption of 205 hours of intercompany usage and 138 hours of commercial usage, the company has incurred loss of $ 30383 with total fixed costs equaling to $212939. Furthermore, the breakeven point for Salem Data Services is 205 intercompany hours and commercial hours of 178 as shown in the appendix. If the company increases the commercial hours from 138 to 178 of usage, then it could easily cover the huge burden of the fixed costs. Apart from this, three options have been proposed by Mr. Flores. In option 1, the price per hour is increased to $1000, reducing demand by 30%. The company still incurs a loss of $ 42995. Option 2 proposes to reduce the price to $600, which would then increase the demand by 30%. However, still the company incurs a loss of $34331. Finally, option 3 proposes to increase the promotional budget which would increase the revenue hours by 30%. This option gives a breakeven point if the promotional expense is increased by $1550.
Â Â Â Â Â Â Â Â Â Â Â A large portion of the total costs of the company is fixed which reduces the profitability of the company. Option 1 and option 2 fail to generate a profit for the company. However, by increasing the promotional budget by %1550, the company could achieve at least a breakeven. Incentivizing the sales team of the company with commissions should also be considered by Flores.
Along with this, other recommendations for the company are to focus on converting its majority of fixed costs into variable costs to achieve the desired price levels. The infrastructure of the company is in place and Salem Data could not become a problem for Salem Telephone in any way………………….
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