Salem Telephone

1. Variable expenses:

           Power**

           Salary of hourly personnel

    Fixed expenses:

           Rent

           Custodial Services

        Computer Leases

        Maintenance

        Depreciation

                Computer Equipment

                Office Equipment or fixtures

           Wage of salaried Staff

Wage of Systems development and maintenance

           Wage of Administration

           Wage of Sales

           Sales Promotion*

           Corporate Services*

*We categorize sales promotion and corporate services as fixed expenses because their amount does not relate to revenue hours. Accounts are only regarded as variable when dealing directly with income-generating activities. Sales promotion and corporate services do not fit this definition. Therefore, even though they fluctuate from month to month, they should be treated as fixed expenses.

**We list power as a variable expense because it is consumed in order to produce revenue, and therefore directly related to revenue hours. Salespersons use power to make calls, and computers use power to process data for customers.

2.

Power:

        January: 2046/329 = 6.22

            February: 1985/316 = 6.28

            March: 2197/361 = 6.09

Hourly Personnel:

        January:7896/329 = 24

        February:7584/316 = 24

        March:8664/361 = 24

Total Variable Costs per revenue hour:

        January: 9,942/329 = 30

        February: 9,569/316 = 30

        March: 10,861/361 = 30

3.

Contribution Margin Income Statement

First Quarter, 2004

4.

(205*400 + T *800) - 30.09 *(205+T) - 212,939 = 0*

*(Intracompany Demand*Intracompany work rate + T*Sales rate) - Variable Rate*(Intracompany Demand+T) - Total Fixed Costs = 0

82,000 + 800T - 6,150 - 30T - 212,939 = 0

770T = 137,089

T = 178.04 = Number of commercial revenue hours of computer use needed to break even