Summary Prestige Data Services is a subsidiary of Prestige Telephone Company, designed to perform data processing for the telephone

company and also to sell computer services to other companies and organizations. The subsidiary started operations in 199 and has yet to e!perience a profitable month and by the end of 199" its income #as lo# enough to necessitate a report to shareholders. $rs. %radley thin&s the company 'ust needs more time #hile $r. (o#e feels it is time to reassess Prestige Data Services. $r. (o#e believes it is possible the accounting reports do not reveal the contribution the Data Service has provided and also the accounting for separate activities may obscure the costs and benefits provided. Therefore #e have used the e!hibits provided to analyze and come to a conclusion #hether Prestige Data services should be shut do#n or allo#ed more time to sho# its contribution. )nalysis 1* The first thing #e noticed is that fi!ed and variable costs are included in the report. +o#ever, variable costs are the only costs that should be considered #hen ma&ing decisions. ,t is also important to loo& at the opportunity cost of the leases for the computer e-uipment, #hich had four years left and are noncancelable. The purpose of the company #as to provide a step to#ards deregulation and #ould decrease the need for a rate increase. )lso if they shut do#n Data Services they #ould have to pay an outside company to provide this service to Prestige Telephone Company along #ith lose the revenue from the commercial sales. ,n regards to the space that Prestige Data uses, they could potentially rent the out the space to an outside company. There #ould also be a benefit to laying the personnel off and not having to pay those #ages and salaries. +o#ever, #e came to the conclusion that Prestige Data Services is more of a benefit than (o#e initially thought and should be given more time to sho# its contribution. .* ,n order to determine the level of commercial sales of computer use necessary to brea& ,n order to determine the level of commercial sales of computer use necessary to brea& even, #e had to determine fi!ed and variable costs. The only variable costs #ere po#er and part of operations salaries. /e found the unit contribution margin, #hich is selling price minus variable cost per unit. Total po#er for all three months is 0 ,1.2 divided by the hours the computer #as in use 3total hours 4 available hours*, 1111 for a result of 05. 6. 7perations salaries paid hourly #as found by ta&ing total operations e!pense of 022,955 divided by 1111 3hours of computer use* for a result of 021.16. Contribution margin8 321195. 6921.16* : 0;1 .65 Prestige Telephone Company has an agreement #ith the Prestige Service Commission 3PSC* to cover 02.,111 of the costs. <sing this assumption and that mentioned in the above paragraph, #e made the follo#ing brea& even analysis8 3=C* 4 >3PSC restriction* 4 3avg monthly hrs ! ?C@unit*A Contribution $argin =C: 39.51B9 111B 511B. 11B"21B1.111B9111B11.11B;";;B1 651* : 191,16; : 1;"."9 hours

191,16; 4 >32.,111 4 3.1 ! 25.""*A

;1 .65 Ta&ing the 1;"."9 hours times the 0211 per hour for commercial sales #ould result in a brea& even revenue of 0151, 6. that #ould be necessary each month. 6* a) Increasing the price to commercial customers to $1,000 per hour would reduce demand by 30%. Month hrs * 0.7 rice $1,000 !an "eb Mar #rs $%.1 &'.' &%.% (M $70,&)).$7 $77,%$$.') $$0,771.1* (urrent $7%,7%).)3 $$7,7$7.3* $$7,7$7.3* +he monthly contribution to ,i-ed costs and income at $$00 is greater than the contribution e-pected at $1,000. +hus, we will get more income i, we maintain the present $$00.hour price. b) /educing the price to commercial customers to $%00 per hour would increase demand by 30%. Month hrs * 0110.32 !an "eb Mar #rs &$.' &1.$ 110.' (M $%1,'1*.'* $%7,1$%.$0 $70,**&.$% (urrent $7%,7%).)3 $$7,7$7.3* $$7,7$7.3* (ompared to present contribution, a price reduction would apparently reduce pro,it. 3o we still should maintain current operation. c) 4n increase in promotion that would increase commercial sales by 30%. Month hrs * 0110.32 !an "eb Mar #rs 1)&.& &10$ 110.' (M $&&,7&).1& $%7,1$%.$0 $70,**&.$% (urrent $7%,7%).)3 $$7,7$7.3* $$7,7$7.3* 3pec. Inc $*3,0*&.%% $*),1&).0) $*%,33%.*0 3ubstract the present contribution, $76560.91could be spent without reducing income. d) /educing operations to 1% hours on wee5days and eight hours on 3aturdays would result in a loss o, *0% o, commercial re6enue hours. Month hrs * 0.$ !an "eb Mar

#rs &$.' (M $%1,'1*.'* (urrent $%7,1$%.$0

10$ 110.' $7%,7%).)3 $70,**&.$% $$3,&$3.)0 $$7,7$7.3*

/educing operation hours does not mean a reduction in ,i-ed costs which are way abo6e the amount o, re6enue restige 7ata 3er6ices is ma5ing. (utting down the wor5ing hours will mean a huge loss beyond what is being witnessed at the current wor5ing hours which ma5es this a bad idea to ,orge ,orward with. 5* Prestige Data Services should sho# consolidated financials for the parent and sub companies so it sho#s the true contribution the Prestige Data is providing for Prestige Telephone Company. There are certain costs #ithin Prestige Data that benefit the parent company, but are only being seen as an e!pense to Prestige Data and not sho#ing these services providing revenue for Prestige Telephone Company. They should also realize that #hen ma&ing decisions variable costs are the costs to consider and not 'ust all reported costs.