Prestige Telephone Company Slides

PRESTIGE TELEPHONE COMPANY
Presented by:-
Md. Ashraf Ansari
Manaswini Mohanta
Niladri Patnaik GROUP NO.-- 5
Neha Kumari
Munawwar Alam
PRESTIGE TELEPHONE COMPANY
• Daniel Rowe, President of Prestige Telephone Company and
Susan Bradley, Manager of company subsidiary, Prestige Data
Services.
• State Public Service Commission permitted the company to
establish computer data service subsidiary.
• In 1994, Rowe told the commission that the subsidiary would
reduce pressure for telephone rate increases.
• Prestige Data Services had grown out of the needs.
• Rowe argued for separate but wholly owned entity which prices
for services would not be regulated.
INTRO CONT…
• The commission accepted this but told that the average monthly
charge for service to the company should not be more than
$82,000.
• In the quarterly report intra company work was billed at $400 per
hour, Prestige Data Services rented the ground floor for
$8,000 per month.
• After examining the report, Rowe resolved to study them, asking
Bradley to estimate the possible effects on profits.
Marginal Costing—
Marginal costing can be defined as an accounting technique whereby
small increase or decrease in output result In change in total cost.
Advantage of marginal costing…
• Marginal Costing is simple to understand and operate; it can be
combined with other forms of costing.
• It helps in short-term profit planning by break-even charts and profit
graphs.
• The effects of alternative sales or production policies can be more
readily appreciated and assessed
Q1. Appraise the result of operations of Prestige Data Services. Is the
subsidiary really a problem to Prestige Telephone Company? Consider
carefully the differences between reported costs and costs relevant for
decision that Daniel Rowe is considering.
ANS-- No subsidiary is not a problem to Prestige Telephone Company as

through subsidiary the company is getting the rent of 8000 and if it will
remove subsidiary the company will suffer a loss of $8000.
If the subsidiary will be removed then it will buy from outsiders at
cost of $800 per hr. causing loss to the company.
Yes Prestige Data Services was problem to Tele company because the
deliveries of equipment were delayed and the personnel had
commanded higher salaries then expected and the most important was
customer were harder to find then earlier estimate had lead the
company to expect.
FIXED COST & VARIABLE COST
Contribution per hour = sales – variable cost.
= 568 – 196
= 372 hours.
Break even point ( in hr ) = Fixed cost / contribution per hour

= 191339 / 372
= 514.3 hours.
Break even point ( in Rs ) = 514.3 hr * 568

= Rs 292122.4
Q2. Assume the company demand for service will average 205 hours per month,
what level of commercial sales of computer use would be necessary to break even
each month?
ANS-- At BEP Profit = 0 .

From the case Variable Cost = 42384
So, variable cost / hour = 42384 / 361 = 117.4
Let ‘x’ be the service hours to be provided to outsiders.
By using equation method,
Profit=Sales-(Fixed cost +Variable Cost)
=> 0 = ( 205 * 400 + x * 800 ) - ( 117.40 (205+x) + 191339)
=> 682.6x = 133406
=> x = 195.44 per hour
Hence, 195.44 per hour commercial sales of computers would be necessary to
break even each month.
Q3– Estimate the effect on income of each of the options Rowe has
suggested if Bradley estimates as follows—
A) Increasing the price to commercial customers to $1,000 per hour
would reduce demand by 30%?
Solution---Increasing the price to commercial customers to $1000/hour

would reduce demand 30%. Commercial Revenue hours= 138.
After 30% reduction in demand, revenue per hour =96.6hr at $1000/hr.
By equation method,
Profit=Sales-(Fixed cost +Variable Cost)
Profit=(205*400+96.6*1000)- (117.40(205+96.6)+191339)
Profit= 178600-226764.84
= $-48146.84/hr.(Loss)
B) Reducing the price to commercial customers to $600 per hour would
increase demand by 30%?
Solution
Reducing the price to commercial customers to $600 per hour would
increase demand by 30%
After 30% increase in demand revenue hrs.=138+ (30% of 138) = 179.4
By equation method,
Profit = Sales - ( Fixed cost + Variable Cost )
=> Profit = ( 205 * 400 + 179.4 * 600 ) - ( 117.40 (205 +179.4 ) + 191339 )
=> Profit = $ - 46972.34 per hr ( Loss )
Here we see that company have loss of $ 46972.34 per hour
C) Increased promotion would increase sales by up to 30%. Bradley is
unsure how much promotion this would take?
Solution---
Increased promotion would increase sales by upto 30%
After 30% increase in demand revenue hrs.=138+(30% of 138)=179.4
By equation method,
Profit = Sales - ( Fixed cost + Variable Cost )
=> Profit = ( 205 * 400 + 179.4 * 800 ) - ( 117.40 ( 205 + 179.4 ) + 191339 )
=> Profit = $ -11152.34 per hr ( Loss )
Q4– Can you suggest changes I the accounting and reporting system
now used for operations of Prestige Data Services which would result
in more useful information for Rowe and Bradley?
ANS--
Now the accounting and reporting system is using equation method for
operations of Prestige Data Services. But by this method the company
is getting loss.
So, instead of using this method the company should use marginal
costing method as in marginal costing
Profit = Contribution - Fixed Cost

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PRESTIGE TELEPHONE COMPANY

ANS-- No subsidiary is not a problem to Prestige Telephone Company as

Break even point ( in hr ) = Fixed cost / contribution per hour

Break even point ( in Rs ) = 514.3 hr * 568

ANS-- At BEP Profit = 0 .

Solution---Increasing the price to commercial customers to $1000/hour

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