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# 1.

Going by the current financial condition of Prestige Data services (PDS), it is currently a liability to the parent company Prestige Telephone Company. PDS is showing operating loss for every month in the first quarter of 2003. However it is seen that Commercial sales for this company are rising (even though the rise is very marginal) and the overall losses are going down month by month. Some steps can be taken by the board to reduce the overall losses could include Increase usage of unused hours by increasing sales promotion Moving to a two shift operation rather than 24 hour operations Moving to a Contribution method of accounting instead of the absorption method to have better idea of breakeven point etc 2. Let us break our mixed cost elements into variable and fixed cost. We see that there is one Mixed cost element here Operations Salary ( The fixed part is due to the 6 people working and the variable part is due to the paid hourly helps ) Using the high low method we have the variable portion of operations salary as Varop =(30264-29184)/(361-360)=24 FixedOp=30264-24*361=21600. Power is another variable cost. Per unit cost of power is coming out as either Month Total Hours Total Cost Per Unit Cost Jan 329+32=361 1633 1633/361=4.52 Feb 316+32=348 1592 1592/348=4.57 Mar 361+40=401 1803 1803/401=4.496 On an average we can see that the approximate variable cost per unit for power is coming out as 4.5 So the Variable costs total = 24+4.5 =28.5 Per unit cost of commercial service is 800/hr. Less variables costs of 28.5 makes contribution margin for each hour of commercial services =800-28.5=771.5 =Contribution Margin per unit for commercial services. Fixed Cost Space Costs 9240 Computer Lease 95000 Maintenance 5400 Depreciation Comp 25500 Office eqp & Fix 680 OperationsFixed 21600 Systems Dev 12000 Administration 9000 Sales 11200 Materials (Fixed) 9000 Sales Promo (Fixed) 8000 Corporate Services 15000 Total 221620

Approximations used Materials is approximated to be fixed at 9000 and Sales promo is approximated to be fixed at 8000. Similarly Corporate Services is approximated to be fixed at 15000. Total Fixed Cost is 221620. However out of this approximately 82000 is for Intra-Company services. Out of this 82000 again we have 205 hours of variable cost, each hour amounting to 28.5 =205X28.5 = 5842.5 So total Fixed cost for commercial services = (221620-(82000-5842.5)) =145462.5 Therefore Breakeven Volume = Fixed Cost / Contribution Margin = 145462.5/771.5=188.54 hours 188.54 hours of commercial Service @ 800/ hr = 188.54X800 = 150832 3.a. Commercial Hours in March 2003=138 Increasing price reduces demand by 30% hence demand = 138X.7 = 97 Hrs (Approx) Increased Price =1000 . Contribution Margin =1000-28.5=971.5 Therefore revenue =97X971.5=94235.5 Currently the Revenue is (800-28.5) X138 = 106467 Hence current is better 3.b Commercial Hours in March 2003 =138 Reducing price increases demand by 30 %, hence demand =1.3X138=180 hrs (Approx) Decreased price =600 hence Contribution Margin =600-28.5=571.5 Therefore revenue =180X571.5=102870. Still less than 106467 which is the current demand hence not feasible 3.c Increased promotion would increase sales by 30%. So demand =180 Hrs So Revenue =180 X (800-28.5) = 138,870 So revenue that can be spent on promotion =138870-106467=32403 3.d Reduced commercial sales hrs =138X.8 =111 (approx.) So Revenue =111 X (800-28.5) = 85636 which is (106467-85636)=20831 less than present 4. The method of costing used by PDS here is a full absorption one which is not amenable to CVP and is also known as historical costing method. Some Fixed cost might not get reflected due to unused capacity and it might show a higher profit due to this. A better method may be to move to the contribution method of accounting system which gives us a better estimate of the breakeven point and overall costing