Salem Telephone Company
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“Revenue hours” represent the key activity that drives costs at Salem Data Services. Which expenses in Exhibit 2 are variable with respect to revenue hours? Which expenses are fixed with respect to revenue hours?
Variable
Fixed
Rent
Power
Custodial
Ops Hourly Wages
Computer Leases
Sales Promotion
Maintenance
Corporate Services
Depreciation (computers)
For each expense that is variable with respect to revenue hours, calculate the cost per revenue hour.
Revenue Hours:
January:
February:
March:
Intra-Company
Commercial
Ttl Revenue Hours
Variable Expenses:
Power
1697
Ops- Hourly
8664
Corp. Services
15,424
15,359
15,236
Ttl. Variable Exp.
24,866
24,428
25,597
Cost per revenue hours = Variable Expenses / Total revenue hours
Power per revenue hours = Power / Total revenue hours
Operations: hourly personnel per revenue hours = Operations: hourly personnel / Total revenue hours
Corporate services per revenue hours = Corporate services / Total revenue hours
Cost per Rev. Hr.:
January:
February:
March:
Power
4.70
Ops- Hourly
24.00
24.00
24.00
Corp. Services
46.88
48.60
42.20
Ttl Cost per Rev Hr
75.58
77.30
70.91
Create a contribution margin income statement for Salem Data Services. Assume that intra-company usage is 205 hours. Assume commercial usage is at the March level.
Assumptions:
We used variable costs per revenue hours at the March level to calculate variable costs as shown in question 2.
We used Sales promotion at the March level.
Selling Price
Revenue Hours
Intra-company
Commercial
Total Revenue Hours
Total Revenue = (Intracompany SP x Intracompany revenue hours) + (Commercial SP x Commercial revenue hours)
Total Variable Costs = (Power cost per revenue hour x Total revenue hours) +(Operations: hourly personnel cost per revenue hour x Total revenue hours) + (Corporate services cost per revenue hour x Total revenue hours)
Total Fixed Costs = Space costs + Equipment costs + Wages and salaries + Sales promotion
Contribution Margin = Total revenue – Total Variable Costs
Operating Income = Contribution Margin – Total Fixed Costs
Contribution Margin Income Statement
Revenue-
Intracompany
82,000
Commercial
110,400
Total revenue
192,400
Variable Costs-
Power
1,612
Operations: hourly personnel
8,232
Corporate services
14,476
Total variable costs
24,321
Contribution margin
168,079
Fixed Costs-
Space costs:
Rent
8,000
Custodial services
1,240
9,240
Equipment Costs-
Computer leases
95,000
Maintenance
5,400
Depreciation:
Computer equipment
25,500
Office equipment and fixtures
126,580
Wages and Salaries-
Operations: salaried staff
21,600
Systems development and maintenance
12,000
Administration
9,000
Sales
11,200
53,800
Sales promotion
8,083
Total fixed costs
197,703
Operating income
(29,624)
Assuming the intra-company demand for service will average 205 hours per month, what level of commercial revenue hours of computer use would be necessary to break even each month?
Since the intra-company demand is known to be 205 hours, the contribution from these sales is assured to cover a portion of the fixed costs. Thus, to determine the level of commercial revenue hours required to break even, the contribution from commercial sales only needs to cover the fixed costs remaining after subtracting the fixed costs already covered by the contribution from intra-company sales.
Break-Even Point = Fixed Expense / Weighted-average Unit Contribution Margin
= Fixed Expense / (Selling Price – Unit Variable Cost)
Selling Price-
Intra-company Usage= 400
Commercial Usage= 800
January: