Prestige Telephone

1. Appraise the results of operations of Prestige Data Services

Data is not a problem to Telephone. He needs to go beyond the operations summary and look at the costs and benefits to Telephone.

"Many of Data’s costs are not relevant to the analysis. Several items are unavoidable costs (equipment leases, depreciation), that Telephone would need to pay even if it closed Data. Others are corporate overhead allocated to Data by Telephone, including some that provide income to Telephone."

"If Telephone closed Data, the unavoidable costs would continue, but it would lose the benefit of Data’s direct and indirect contributions to Telephone."

Relevant Income "68,787 " "78,435 " "82,975 "

Relevant Expenses paid by Data

Rent "8,000" "8,000" "8,000"

Custodial Services "1,240" "1,240" "1,240"

Corporate Services "3,680" "3,754" "3,773"

Telephone better off by … "81,706 " "91,429 " "95,988 "

"2. Assume Intercompany demand at 205, what level of commercial hours will breakeven?"

Fixed Costs " 211,202.37 " " 210,360.07 " " 211,029.26 "

LESS: CM (Intercompany) @ 205 Units " 75,544.55 " " 75,507.65 " " 75,312.90 "

LESS: CM (Company Other) @ 205 Units 838.07 " 1,037.97 " " 2,283.39 "

Fixed Costs Remaining for CM (Commercial) " 134,819.75 " " 133,814.44 " " 133,432.97 "

Unit CM (Commercial) 772.60 773.39 778.52

Units Required to Breakeven 175 173 171

3. Estimates of effects on income

"a. Increasing the price to commercial customers to $1,000/hr and reduce demand by 30%."

Fixed Costs "211,202.37" "210,360.07" "211,029.26"

Net Income " (52,529.15)" " (52,509.33)" " (34,089.05)"

Not recommended. The reduction in demand outweighs the increase in unit price.

b. Reducing the price to commercial customers to $600/hr and increase demand by 30%

Fixed Costs "211,202.37" "210,360.07" "211,029.26"

Net Income " (45,171.92)" " (44,369.92)" " (25,344.39)"

Not recommended. The reduction in price outweighs the