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Prestige Company

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Q1 In the first quarter of 2003, Prestige Data Services (PDS), a strategic subsidiary of Prestige Telephone, is showing a net loss of $75K. Their monthly revenues for the quarter have varied from $189K to $212K and their expenses have remained relatively flat around $222K each month.
Table 1: High Level Q1 2003 Financials It might appear that the data subsidiary is continuing to lose money and should be considered as a candidate for elimination. However, that is NOT the case. The financials don’t show the true value of PDS to Prestige Telephone as a whole. First of all, the data processing services that PDS provides are necessary for Prestige Telephone’s operation and if they don’t buy them from PDS they will buy them from another third party. Those costs are estimated to be around $82K per month, much more than the data subsidiary’s monthly losses in Q1 2003. Second, there is significant strategic value in PDS to Prestige Telephone. Based on current regulatory restrictions, the telephone operation is unable to change rates charged to customers for its telephone services. At PDS, however, rates to external commercial customers can be changed. As the potential market for data processing still is believed to exist, this gives PDS the opportunity to better exploit that opportunity and turn the current losses into profits in the future. Lastly, the opening of the PDS subsidiary is viewed by the Public Utilities Commission as a step for Prestige Telephone towards deregulation in the future. Deregulation would give Daniel Rowe much more control over the rates and services of the telephone business going forward. Q2. With company demand at 205 hours per month, what level of commercial sales would be necessary to break even?
A level of commercial sales of 267 hours would be necessary to break even each month:

Q3. Please see appendix for

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