REPORT

ON
PRESTIGE TELEPHONE COMPANY

SUBMITTED BY:

GROUP-4
DEEPIKA PATRA(15202084)
KALYANI MOHANTY(15202090)
PUJALIN PANDA(15202104)
ACHINTO BANDYOPADHYAY(15202067)
CHANDAN PATRO (15202081)

CASE PROBLEM
Prestige Data Services is a subsidiary of Prestige Telephone Company, designed
to perform data processing for the telephone company and also to sell computer services
to other companies and organizations. The subsidiary started operations in 1995 and has
yet to experience profitable month and by the end of 1996 its income was low enough to
necessitate a report to shareholders. Mrs. Bradley thinks the company just needs more
time while Mr. Rowe feels it is time to reassess Prestige Data Services. Mr. Rowe
believes it is possible that the accounting reportsdo not reveal the contribution the Data
Service has provided and also the accounting for separate activities may obscure the costs
and benefits provided. Therefore we have used the exhibits provided to analyze and come
to a conclusion whether Prestige Data services should be shutdown or allowed more time
to show its contribution.
Case Summary
Prestige Data Services is a subsidiary of Prestige Telephone Company, designed to perform
dataprocessing for the telephone company and also to sell computer services to
other companies andorganizations. The subsidiary started operations in 1995 and has yet
to experience a profitable monthand by the end of 1996 its income was low enough to
necessitate a report to shareholders. Mrs. Bradleythinks the company just needs more time while
Mr. Rowe feels it is time to reassess Prestige DataServices. Mr. Rowe believes it is possible the
accounting
reports do not reveal the contribution theData Service has provided and also the accounting for
separate activities may obscure the costs andbenefits provided. Therefore we have used the
exhibits provided to analyze and come to a conclusionwhether Prestige Data services should be shutdown
or allowed more time to show its contribution.

Alignment of Case with the Theory

The purpose of this case is to conduct CVP (Cost Volume Profit Analysis) in a mixed
non-profit/profitservice context. In the case, it has been asked that as the controller of Prestige
Telephone Company,analyze the 1997 first-quarter operating results for Prestige
Data Services (a fully-owned subsidiary) andpossible alternative courses of action to
improve performance of Prestige Data in the future.
Main Issues in the Case Study
The main issues as understood from the case study are-

To continue or stop Prestige Data Services operation or separate as stand-alone entity fromparent
company since it is not generating profit.

Considering changes in pricing or promotion that might improve profitability.

Reduces company resources wastage if any.
Reduce service hour from 24 hour to 2 shifts per day
COST VOLUME PROFIT ANALYSIS
Cost-volume-profit analysis of the subsidiary requires a break up of the costs into fixed and variable
costs.
The only variable costs are power and part of the operations wages paid to hourly workers. It can be
estimated that power costs are about $4.50 per hour and the variable portion of the operations wages is
$24 per hour and the fixed portion of the operations wages is $21,600.
We will assume that materials are offset by other revenue and therefore, can be excluded from analysis.
We will also assume that for the purposes of planning, sales promotion expenses are about
$8,000 per month.
Further we willassume that $15,000 reimbursement for corporate services provided by Prestige to its
subsidiary can be a reasonable estimate of the long run consumption of administrative resources by

Prestige

Data.

The

total

relevant

monthly

fixed

costs

for

the

subsidiary

are:9,240+95,000+5,400+25,500+680+21,600+12,000+9,000+11,200+8,000+15,000= 212,620.
Power ($4.50 per hour) and part of the operations wages ($24 per hour) are the onlyvariable costs.
With low variable costs ($28.50 per hour) to deduct from the commercial revenues per hour ($800 per
hour) each commercial hour sold generates a high contribution to fixed costsand profit.
In addition, the assumption that Prestige Telephone Company can always cover $82,000 of the cost under
its agreement with the Public Service Commission enables that amountto be deducted directly from fixed
cost in determining break-even volume. Hence, from thisanalysis, it is easy to calculate a break-even
volume as follows:
(Total Fixed Costs) Less (Allowed Costs After Variable Costs of Intercompany
Operations) = Breakeven HoursContribution per Hour (800-4.50-24)$212,620 [$82,000
(205 Hours x $28.50 = $5,843)] = 176.88 Hours$771.50
176.88 hours at $800 per hour is equal to $141,504 of commercial revenue per month.

Analyzing Options Discussed in Question 3

Each of the sets of assumptions in Question #3 in the case offers the opportunity
toanalyze the effects of possible changes in demand due to changing price, promotion or
operatingconditions. The analyses are dependent upon the cost analysis previously
completed. Once thatanalysis is accepted, each calculation is straightforward. A summary
follows:a.Increasing the price to commercial customers to $1,000 per
hour would reducedemand by 30%. In March 1997, demand was for 138 hours, and a
30% reductionwould leave demand of 97 hours (138 hours x .70 = 96.6 hours).Demand x
Contribution per hour = Contribution97 hours x ($1,000 - $28.50) = $94,236Compare to
present:138 hours x ($800 - $28.50) = $106,467The monthly contribution to fixed costs
and income at $800 is greater by $12,231than the contribution expected at
$1,000. Therefore, the income will be higher if weretain the $800/hour price. b.Reducing
the price to commercial customers to $600 per hour would increase demand by 30%. In

March 1997, demand was for 138 hours, so that a 30% increase wouldgive demand of
179 hours (138 hours x 1.30 = 179.4 hours
179 hours x ($600 - $28.5) = $102,299
Compared to present contribution of $106,467, a price reduction would apparentlyreduce
profit by $4,169 per month.c.An increase in promotion that would increase
commercial sales by 30% wouldincrease sales to 179 hours per month. At $800 per
hour, the total contribution would be:179 hours x ($800 - $28.5) = $138,099An amount
up to the difference between this new contribution and the presentcontribution of
$106,467 or $31,632 could be spent without reducing income.d.Reducing hours would
reduce demand for commercial revenue hours by 20%, from138 hours to 110
hours. At that level, the total contribution would be:110 hours x ($800 - $28.5) = $84,865
or $21,602 less than at present.But what expenses could be saved? Except for operations
wages (and perhapsmaterials and supplies) it appears most other expenses would not be
affected by thisreduction of service and revenue. $21,600 of operating wages are
nonvariable, so perhaps one-third of that could be eliminated by going on two-shift
operations rather than three shifts. Savings of $7,200 hardly offsets a loss of contribution
of $21,602,so the option of giving up a shift appears not very attractive.