Prestige Telephone Company Discussion Questions

Prestige Telephone Company

Question 1: Appraise the results of operations of Prestige Data Services (PDS). Is the subsidiary really a problem to Prestige Telephone Company (PTC)? Consider carefully the differences between the reported costs and costs relevant for decisions that Daniel Rowe is considering.

The current data indicates that Prestige Data Services is operating at a loss, and I believe that it at this point in time could be an issue for Prestige Telephone Company. If Prestige Data Company were dissolved or closed down, Prestige Telephone Company would still be liable for specific expenses (computer leases, office equipment, maintenance on equipment, etc.) If Data were not longer in existence and they would not have additional revenue to offset those costs. I would also take into account that the way data has been collective, costs calculated and presented could be different from the actual reality of the situation. However on the contrary, commercial sales have continued to increase through the 3 months shown and the losses are slowly being reduced. There is also reporting that shows that Prestige Data Company is operating with unused capacity. If they were operating at capacity would there still be a reported loss? As a manager we also need to take into account that Prestige Data Company was formed to diversify Prestige Telephone Company, as they were encouraged to seek new sources of revenue & profit.  

Prestige Data Company is also providing revenue to Prestige Telephone Company through items such as rent and custodial services. My question would be if they could find these services elsewhere at a better cost, since Prestige Telephone Company is currently providing them.

If Prestige Data Company were to look at investing into marketing activities, making corporate consumers aware of the new services offered, would we see an uptick in corporate sales and allotment of capacity being used? Often times it take a while for marketing activities or initiatives to pay off or to see the return.

2. Briefly analyze the cost behavior of the revenues and expenses for Prestige Data Company.

In January Intercompany sales were roughly $82K, which decreased to around $72K, and then came back up in March to the highest they had brought in at $89K. With intercompany sales dipping in February, Prestige Data Company also saw a dip in revenue during that month as well. Commercial sales continued to increase each month from $94K in January up to $110K in March. Total revenue in January was $190K between primarily intercompany sales and commercial sales. In February revenue decreased to $189K primarily due to Intercompany sales decreasing during that time frame, and in March sales were the highest of the three months at $212K. Fixed costs were flat for all three months and variable costs such as materials and corporate services fluctuated appropriately with each month. In the higher months, January and March, expenses were higher, while in the lower month of February expenses were slightly lower.

3. Assume a variable cost of $28 per hour, commercial revenues of $800 per hour and fixed costs of $115,820. Also, assume actual utilization of 138 hours- this is what is given in exhibit 1 for March. (Please ignore any intercompany effects for this questions.)

a. What is break even volume (hours)?

Total  Costs = Volume Cost + Fixed Costs

Variable Cost = $28 / hour x 138 hours = $3,864

TC = $115,820 + $3,864= $119,684

Revenue = $800 per hour for corporate sales x 138 Hours = $110,400

 (Total Cost- Revenue) / Hours = Break Even

( $119,684- $110,400)/ 138 = Break Even

Break Even = 67.275 hours

b. Estimate the effect on income of each of the options Rowe has suggested if Bradley estimates as follows:

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

New demand is decreased by 41.4 hours to 96.6 hours.

VC= $28 / hour x 96.6 hours = $2704.80

TC=  $115,820 x VC ($2704.80)= $118,524.80

Revenue = $1,000 x 96.6 hours = $96,600

Revenue decreased when price increased & is not enough to offset the 30% decrease in hours.

TC $118,524.80 – Revenue $96,600= $21924.80  / 96.6 hours = 226.96 Break Even hours

Break-even point increased over 3x of what it previously was.

The increase in price and decrease in demand ultimately leads to a decrease in revenue where expenses remain unchanged with the fluctuation in demand. Should services be in high demand, there might be room for a price increase without seeing a decrease in sales and in turn an increase in profits. (Something similar to what hotels do during major events; Kansas City hotels & the World Series.)

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

New demand would be increased by 41.4 hours to 179.4 hours.

VC= $28/ hours x 179.4 = $5,023.20

TC= $115,820 + VC ($5,023.20) = $120, 843.20

Revenue = $600 x 179.4 hours= $107,640

TC ($120,843.20) – Revenue ($07,640)= $13,203.20 / 179.4 = 73.60 Break Even Point

By reducing the price of services, the demand is increased by 30%. With the reduced price and increased demand there is still not enough volume to offset and to obtain the amount of revenue it is needed to cover the costs and keep the business running sustainably.

iii. Reducing operations to 16 hours on weekdays and eight hours on Saturdays would result in loss of 20% of commercials revenue hours.

Reducing operations does not mean that the fixed costs will be reduced as well. With the fixed costs still being above the amount that is being brought into the company, reducing operations doesn’t solve the issue of not making enough to sustain long term. Additionally I would be concerned with limiting the number of hours in which individuals are available to assist and to sell. I have heard of examples of schools doing this and reducing their costs through energy savings and reducing transportation costs, however for a sales organization I wouldn’t recommend this approach. It could also leave possible consumers with a way to be unable to reach someone when they need assistance leaving to a bad customer experience.