Salem Telephone Company Case Study Essay
Salem Telephone Company Case Study
The variable costs in Exhibit 2 are Power and Hourly Personnel Wages as the costs fluctuate from month to month and are driven by the revenue hours for the company. The fixed costs in Exhibit 2 are Rent, Custodial Services, Computer Equipment Leases, Computer Maintenance, Computer Depreciation, Office Equipment and Fixtures Depreciation, Salaried Staff Wages, Systems Development and Maintenance, Administrative Wages, Sales Wages, Sales Promotion, and Corporate Services.
Rent, Custodial Services, Computer Equipment Leases, Computer Maintenance, Computer Depreciation, Office Equipment and Fixtures Depreciation, Salaried Staff Wages, Systems Development and Maintenance, Administrative Wages, and Sales Wages are all obviously fixed because the expenses do not vary monthly. However, Sales Promotion and Corporate Services expenses change monthly, but the change is not dependent on revenue hours. Therefore, they are fixed with respect to revenue hours.
Based on the above analysis, Salem Data Services does not appear to be an overwhelming liability for Salem Telephone Company. Over the past few months, Salem Data services has come increasingly close to breaking even and is worth the time Salem Telephone Company may have to give to see if the company will grow. It is also very important to note that a large portion (12.3%) of Salem Data Services’ fixed cost is from depreciation, which is not an actual cost of the company.
There are some changes that Flores could make to make Salem Data Services much more profitable and it starts with reducing the company’s fixed costs. The company has a very high operating leverage, which makes its earnings very volatile. High fixed costs could pay off if the company was turning a profit, but with a relatively new company like this that is struggling to break even, it would be most effective to decrease their operating leverage.