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Prestige Telephone Company Case Solution
| Solution Id | Length | Case Author | Case Publisher |
|---|---|---|---|
| 2085 | 678 Words (4 Pages) | William J. Bruns | Harvard Business School : 197097 |
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Based on the current reporting procedure that has been adopted by Prestige Data Services, it is recommended that the subsidiary should make use of allocation-based costing in which the fixed and variable overheads will be allocated to the section based on the revenue generated. This would allow for a fair booking of expenses under the head of the subsidiary, giving a true picture of its performance.
Following questions are answered in this case study solution:
-
Appraise the results of operations of prestige Data Services. Is the subsidiary really a problem to Prestige Telephone Company? Consider carefully the differences between reported costs and costs relevant for decisions that Daniel Rowe is considering.
-
Assuming the company demand for services will average 205 hours per month, what level of commercial sales of computer use would be necessary to break even each month?
-
Estimate the effect on income of each of the options Rowe has suggested if Bradley estimates as follows
a. Increasing the price to commercial customers to $1,000 per hour would reduce demand by 30%.
b. Reducing the price to commercial customer to $600 per hour would increase demand by 30%.
c. Increasing promotion would increase sales by up to 30%. Bradley is unsure how much promotion this would take. (How much could be spent and still leave prestige Data Services with no reported loss each month if commercial hours were increased 30%?)
d. Reducing operations to 16 hours on weekdays and eight hours on Saturdays would result in a loss of 20% of commercial revenue hours.
-
Can you suggest changes in the accounting and reporting system now used for operations of Prestige Data Services Would result in more useful information for Rowe and Bradley?
Case Study Questions Answers
1. Appraise the results of operations of prestige Data Services. Is the subsidiary really a problem to Prestige Telephone Company? Consider carefully the differences between reported costs and costs relevant for decisions that Daniel Rowe is considering.
The calculations are as follows:
|
Jan |
Feb |
March |
|
|
Net Profit/Loss |
$ (41,472) |
$ (40,341) |
$ (21,438) |
|
Add: Materials |
$ 9,031 |
$ 8,731 |
$ 10,317 |
|
Add: Equipment Cost |
$ 100,400 |
$ 100,400 |
$ 100,400 |
|
Add: Corporate Services |
$ 15,424 |
$ 15,359 |
$ 15,236 |
|
Add: Systems Development & Maintenance |
$ 12,000 |
$ 12,000 |
$ 12,000 |
|
Add: Administration |
$ 9,000 |
$ 9,000 |
$ 9,000 |
|
Add: Sales |
$ 11,200 |
$ 11,200 |
$ 11,200 |
|
Add: Space Costs |
$ 9,240 |
$ 9,240 |
$ 9,240 |
|
Adjusted Profitability |
$ 124,823 |
$ 125,589 |
$ 145,955 |
It seems that the subsidiary is generating positive value for the business as the irrelevant costs have been eliminated and not apportioned on the subsidiary.
2. Assuming the company demand for services will average 205 hours per month, what level of commercial sales of computer use would be necessary to break even each month?
The breakevens calculation are as follows:
3. Estimate the effect on income of each of the options Rowe has suggested if Bradley estimates as follows
The changes in revenue under the different scenarios are as follows:
a. Increasing the price to commercial customers to $1,000 per hour would reduce demand by 30%.
|
3a |
Jan |
Feb |
March |
|
Commercial Sales |
$ 86,100 |
$ 94,500 |
$ 96,600 |
|
Less: Space Costs |
$ 9,240 |
$ 9,240 |
$ 9,240 |
|
Less: Equipment Depreciation |
$ 26,180 |
$ 26,180 |
$ 26,180 |
|
Less: Power |
$ 704 |
$ 773 |
$ 790 |
|
Less: Operations |
$ 12,452 |
$ 13,667 |
$ 13,971 |
|
Less: Sales Promotion |
$ 7,909 |
$ 7,039 |
$ 8,083 |
|
Income |
$ 29,615 |
$ 37,601 |
$ 38,337 |
b. Reducing the price to commercial customer to $600 per hour would increase demand by 30%.
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