Prestige Telephone Company
I. Synthesis/Background of the Case
In 1995, Prestige Telephone Company created a subsidiary, Prestige Data Services.The intent of creating Prestige Data Services was to provide a revenue stream to subsidize the telephone operations and alleviate the need for a rate increase. Unfortunately,Prestige Data Company has not met profit expectations. In fact, Prestige Data Company continuously experience net losses making it necessary to reassess operations. Mrs. Bradley, manager of Prestige Data Services, thinks the company just needs more time while Mr. Rowe feels it is time to reassess Prestige Data Services.
II. Statement of the Problem
What should the Prestige Telephone Company do with its subsidiary, Prestige Data Company, since it continuously incurred net losses from its operations?
III. Statement of the Objectives
Using the facts of the case, the analysis aims to further understand the following objectives:
Using the financial statement presented, to properly identify the fixed and variable cost component and identify what is the minimum number of hours for Prestige Data Company to cover the fixed cost.
IV. Point of View
The group will be taking the point of view of the manager.
V. Conceptual Framework and Areas of Consideration
The analysis of the case would involve answering the following questions:
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.
Answer:A lot of benefits has been avoided by Prestige Telephone Company which includes the following:
Lower cost of intercompany work which is billed at $400 per hour. Third party services are billed at $800 per hour.
Tax benefits on the part of the Parent. Due to losses incurred by the subsidiary, the income of the is decreased in consolidation process which results to a lower tax base for the provision of income taxes.
Assuming the company demand for service will average 205 hours per month, what level of commercial sales of computer use would be necessary to break even each month?
Answer: The company should have commercial hours of 175 hours. Using Exhibit 2, the following table is the analysis of what is the component of fixed and variable cost. It has been identified that majority of the costs presented are fixed costs and only a component of power for the equipment costs and a component of the operations salaries and wages are considered as variable costs.
Jan
Feb
Mar
Var/Fix/Mix?
Expenses
Space Costs
Space
8,000
8,000
8,000
Fixed Cost
Custodial Services
1,240
1,240
1,240
Fixed Cost
Total Space Cost
9,240
9,240
9,240
Equipment Costs
Computer Leases
95,000
95,000
95,000
Fixed Cost
Maintenance
5,400
5,400
5,400
Fixed Cost