Salem Telephone Company

1. „Revenue hours" represent the key activity that drives costs 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?

Expenses

Spase costs:

Rent Fixed cost1

Custodial services Fixed cost2

Equipment costs

Computer leases Fixed cost3

Maintenance Fixed cost4

Depreciation:

Computer equipment Fixed cost5

Office equipment and fixtures Fixed cost5

Power Variable cost6

Wages and salaries

Operations: salaried staff Fixed cost7

Operations: hourly personnel Variable cost8

Systems development and maintenance Fixed cost9

Administration Fixed cost10

Sales Fixed cost10

Sales promotion Fixed cost11

Corporate services Fixed cost11

1 The rent is a fixed cost because SDS has to pay the rent at Salem Telephone independent how many hours they are selling. That means even if SDS sell nothing the rent has to be paid.

2 The custodial services are fixed cost because they depend on Salem Telephone's estimated annual cost per square foot and so they are independent from the revenue of SDS.

3 The computer equipment is a fixed cost due to the fact that normally they were purchased before starts the business and so they are independent from the revenue.

4 The maintenance is a fixed cost because ad example the inventory has always to be controlled independent if SDS sell 100 hours or 300 hours.

5 The deprecation is a fixed cost because the value adjustment depends on the number of years that I'm using the equipment and the kind of equipment but not from the revenue hours.

6 Power is a variable cost due to the fact that there is a direct connection between computer utilization, which is increasing with the number of hours sold, and energy consume.

7 The salaried stuff is a fixed cost because it consist of the six people necessary to run the center which means they are always necessary independent if SDS is selling 100 or 200 hours.

8 The hourly personnel works only when the computer are in operation, and seen that the operations are increasing with the increasing of hours sold it exist a connection between hourly personnel and revenue.

9 This is a fix cost because the system had to developed and maintained in continuous to guarantee a working system and not to lose the connection with the competition, independent from the number of hours which is selling SDS

10 This is a fixed cost due to the fact that in the text is missing a nearer explanation and so I assume that they get a fixed monthly retribution independent from the revenue.

11 At this two points first I was unsure which type of cost it could be (caused from understanding problems back-supply to my language handicap), but calculating the variable cost per revenue hour I noticed that they weren't remaining constant (which they should be) and so I'm assuming that they are fixed costs.

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

Using the date from Exhibit 1 I know the total revenue hours, which are distributed in the following way:

January February March

Total revenue hours 329 316 361

The cost per revenue hour I'm getting simply by dividing the single variable cost by the total revenue hours:

Cost per revenue hour =

January February March

Power

Operations: hourly personnel

Total variable cost per revenue hour

$ 28.70 / h $ 28.70 / h $ 28.70 / h

How we can see the cost per revenue hour remain the same, even if the number of hours sold is changing from month to month. This is a characteristic of the variable cost per unit, which remains constant although the activity increases or decreases.

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.

Variable cost per unit

Power $ 4.70

Operations: hourly personnel $ 24

Revenues $ 192,400

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

Commercial sales ($ 800 x 138) $ 110,400

Variable Cost ($ 9,844.1)

Power ($ 4,7 x 343) ($ 1,612.10)

Operations: hourly personnel ($ 24 x 343) ($ 8,232)

CONTRIBUTION MARGIN $ 182,555.90

Fixed Cost ($ 212,939)

Rent ($ 8,000)

Custodial Services ($ 1,240)

Computer leases ($ 95,000)

Maintenance ($ 5,400)

Depreciation Computer equipment ($ 25,500)

Depreciation