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Power Operations: hourly personnel Total variable costs Total revenue hours Variable costs per revenue hour
Revenues
Intracompany (400 x 205) Commercial (800 x 138) Total Revenues Variable expenses (power + hourly person) Contribution margin Fixed expenses Rent Custodial services Computer leases Maintenance Depreciation Salaried staff System development Administration Sales Sales promotion Corporate services Total fixed expenses Net income 82,000 110,400 192,400 9,844 182,556 212,939 8,000 1,240 95,000 5,400 26,180 21,600 12,000 9,000 11,200 8,083 15,236 212,939 -30,383
Intracompany sales (a x 205) $ 82,000.00 Variable costs (b x 205) ($ 5,883.50) Contribution margin $ 76,116.50 We can see from the Exhibit the intracompany sales of hours give us a contribution margin of $ 76,116.50 which means that they are covering this amount of the fixed cost.
Total fixed cost Fixed cost covered by intracompany sales Fixed cost remaining
To reach break-even we need to sell that number of commercial hours to cover, beside the variable cost, the amount of $ 136,822.50 of fixed cost. To calculate this we are using the following equation: (205 400 + x 800) 28.7 (205 + x) 212939 = 0 82000 + 800x 5884 28.7 x 212939 = 0 x = 178 Therefore, SDS needs to serve at least 178 commercial hours to break even
On the other hand, if the commercial price is reduced to $600, the demand increases 30%. The result of net income will be:
x = 138 (1 + 0.3) 180 (205 400 + 180 600) 28.7 (205 + 180) 212939 = 33989 Another suggestion is to increase 30% commercial hours by increasing sales promotion. In such way, the extra costs from promotion should not exceed: x = 138 (1 + 0.3) 180 (205 400 + 180 800) 28.7 (205 + 180) 212939 = 2012
Fixed expenses
Rent 8,000
Maintenance
Power Salaried staff Hourly personnel System development
5,400
1,697 21,600 8,664 12,000
Administration
Sales Sales promotion Total saved expenses Outsourcing costs
9,000
11,200 8,083 85,644 164,000
-78,356
STC can only save $85644 by closing SDS, but it needs to spend $164000 to purchase service from outside. In other words, STC needs to pay extra $78356 if SDS does not exist. Therefore STC should keep SDS business. Since SDS is essential to keep, the first priority of SDS goal is to break even, at least. We recommend Cynthia Wu to combine both Flores suggestions. That is, both increase the promotion budget and also reduce price, which will make SDS become profitable more easily.