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Salem Case Study

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Salem Telephone Company Case Study
Salem Telephone Company Case Study Introduction Salem Data Service, SDS, is a vital asset to Salem Telephone Company. Even though there are losses occurring, SDS has begun to increase performance and losses have been decreasing over the last several months.
Background
Salem Telephone Company needed computer services to plan, control, and account for operations so it created Salem Data Service, SDC. Because Salem Telephone Company was a regulated utility, it needed to gain approval for this venture. This new subsidiary would be separate but wholly owned by Salem Telephone Company. Salem Data Service was allowed to compete with other computer service organizations, but it could not charge Salem Telephone Company more than $82,000. Both companies would pay each other for services rendered.
Key Problems Revenue and cost data in the quarterly review revealed the lowest return on investment in seven years. Flores is reluctant to shut down or sell SDS, but feels that it is time to reassess SDS profitability. He has scheduled a meeting with Wu to discuss 3 possible scenarios.
Alternatives
Flores is contemplating asking Wu to estimate the effects on profit from increasing price to customers; not including Salem, reducing price, and increasing sales efforts.

1) Which expenses are variable and which are fixed with respect to revenue hours
Fixed cost in respect to revenue hours:
Rent ($8,000)
Custodial services ($1,240)
Computer leases ($95,000)
Maintenance ($5,400)
Depreciation:
Computer equipment ($25,500)
Office equipment and fixtures ($680) Wages and salaries
Operations: salaried staff ($21,600) Systems development and maintenance ($12,000)
Administration ($9,000)
Sales ($11,200)
Sales promotion ($8,083)
Corporate services ($15,236)

Variable cost in respect to revenue hours:
Power ($1,697)...

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