Salem Telephone Case

Salem Telephone Company / Salem Data Services


Sunday, February 8, 2009

Presented By:

Steven Brown, Marilynn Homer, Anthony Thesing

BUS 5431 - Managerial Accounting – Spring1 2009

Professor Tim Muth

In 2001, Salem Telephone Company created a subsidiary, Salem Data Services (SDS). The intent of creating SDS was to provide a revenue stream to subsidize the telephone operations and alleviate the need for a rate increase.  Unfortunately, after 3 years, SDS has not met profit expectations. In fact, SDS continued to experience losses at the rate of $40-$45k per month making it necessary to reassess operations. While providing services to both internal and external customers, SDS found that their computer system had surplus capacity to support additional commercial sales.  Based on the amount of unsold monthly computer hours, Salem Data has about $190k of revenue potential from the commercial sales. With increasing pressure from shareholders and record low financial performance, Salem Telephone reexamined the current business model for SDS. However, Salem Data’s ability to reduce costs is limited based on 91% of expenses being fixed presents a challenge to overcome losses. The following analysis is an overview of performance, assessment of costs and estimates for possible effects of increasing profits concluded by a future recommendation for Sales Data Services.

During first quarter operations, Salem Data Services reported 90% of accrued costs were fixed with the remaining being variable.  Fixed costs included rent, custodial services, computer leases, equipment maintenance, depreciation, power, system development/maintenance, employee salaries. Salem Telephone also provides corporate serv ...
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