In 2001, Salem Telephone Company created a subsidiary, Salem Data Services (SDS). The intent of creating SDS was to provide a revenue stream to subsidize the telephone operations and alleviate the need for a rate increase. Unfortunately, after 3 years, SDS has not met profit expectations. In fact, SDS continued to experience losses at the rate of $40-$45k per month making it necessary to reassess operations. While providing services to both internal and external customers, SDS found that their computer system had surplus capacity to support additional commercial sales. Based on the amount of unsold monthly computer hours, Salem Data has about $190k of revenue potential from the commercial sales. With increasing pressure from shareholders and record low financial performance, Salem Telephone reexamined the current business model for SDS. However, Salem Data’s ability to reduce costs is limited based on 91% of expenses being fixed presents a challenge to overcome losses. The following analysis is an overview of performance, assessment of costs and estimates for possible effects of increasing profits concluded by a future recommendation for Sales Data Services.
During first quarter operations, Salem Data Services reported 90% of accrued costs were fixed with the remaining being variable. Fixed costs included rent, custodial services, computer leases, equipment maintenance, depreciation, power, system development/maintenance, employee salaries. Salem Telephone also provides corporate services for processing accounts receivable and past-due accounts which fixes the cost paid out by SDS for an essential function of the company. Variable costs include hourly wages and sales promotion since they depend on the amount of business and can change with business activity. Since these were the only variable costs, the cost per revenue hour was calculated (Figure 1) for both operations and sales during first quarter.
While January through March remained constant at a level of $24.00 per revenue for hourly operations, sales promotion per revenue hour went down $24.04 in January to $22.39 per revenue hour in March. As a result, expenses went down as revenue hours decreased. March, however, was the highest revenue generating month all quarter. SDS has focused their efforts to increase revenues by selling the available hours that are available to other companies to turn a higher profit. In order to achieve higher sales and increase profits, Salem needs to focus its efforts on sales promotion. The extra revenue will cover the fixed costs and improve the profit outlook.