Prestige Telephone Company
Content
Prestige Telephone Company
Introduction
Prestige Data Services (PDS) was a subsidiary of Prestige Telephone (PT) Company. PDS - Data processing for the telephone companies & sold computer services to other companies. Yet to experience profit. Manager -More time required for business to become profitable. President - Reduce the drain in company resources.
Objectives
Analyze the results of operations. Understand the economics of a business. Forecast the potential change in income with each alternative solution. Understand cost information reporting.
Issues
To continue or stop Prestige Data Services operation or separate as stand-alone entity from parent company since it is not generating profit. Consider changes in pricing or promotion that might improve profitability. Reduce company resources wastage if any. Reduce service hour from 24 hour to 2 shift per day.
Question1 Solution
Non-cancelable leases on computer equipment have four more years to run. If Prestige shuts down the subsidiary it needs to outsource data services from an outside vendor almost double the cost to present system. Add back the depreciation (non-cash) the net loss convert into profit in the month of March. $800 per hour is acceptable price.
Contd.
Opportunity costs rather than reported or historical costs should be used. And Prestige Data Services is not really a problem to Prestige Telephone Co. Reported cost includes total cost i.e. variable cost and fixed cost. But in decision making only variable cost will be considered. Reported Cost $ 160413 Relevant Cost $ 61860
Question 2 Solution
Break Even Point- Total Cost = Total Revenve January 231513 ± 82000 $800 = 187 hours February 229925 ± 82000 $800 185 Hours March 233723-82000 $800 163 Hours
Question 3 Solution
a) Effect on Income ± Decrease in Revenue b) Effect on Income - Decrease in Revenue c) Effect on Income ± Increase in Revenue d) Effect on Income - Decrease in Revenue
Question 4 Solutions
Statement:- Prestige Data Services should prepare its own cash flow statement . Profit in the month of March. No need to close down the PDS. Balance sheet of both the companies together reqd.
Contd.
Cash Flow Statement
Jan Feb March Net Income (Loss) Add :- Depreciation $(41472) $ 26180 $(40341) $ 26180 $(21438) $ 26180
Cash flow from operating Activities
$(15292)
$(14161)
$ 4742
Introduction
Prestige Data Services (PDS) was a subsidiary of Prestige Telephone (PT) Company. PDS - Data processing for the telephone companies & sold computer services to other companies. Yet to experience profit. Manager -More time required for business to become profitable. President - Reduce the drain in company resources.
Objectives
Analyze the results of operations. Understand the economics of a business. Forecast the potential change in income with each alternative solution. Understand cost information reporting.
Issues
To continue or stop Prestige Data Services operation or separate as stand-alone entity from parent company since it is not generating profit. Consider changes in pricing or promotion that might improve profitability. Reduce company resources wastage if any. Reduce service hour from 24 hour to 2 shift per day.
Question1 Solution
Non-cancelable leases on computer equipment have four more years to run. If Prestige shuts down the subsidiary it needs to outsource data services from an outside vendor almost double the cost to present system. Add back the depreciation (non-cash) the net loss convert into profit in the month of March. $800 per hour is acceptable price.
Contd.
Opportunity costs rather than reported or historical costs should be used. And Prestige Data Services is not really a problem to Prestige Telephone Co. Reported cost includes total cost i.e. variable cost and fixed cost. But in decision making only variable cost will be considered. Reported Cost $ 160413 Relevant Cost $ 61860
Question 2 Solution
Break Even Point- Total Cost = Total Revenve January 231513 ± 82000 $800 = 187 hours February 229925 ± 82000 $800 185 Hours March 233723-82000 $800 163 Hours
Question 3 Solution
a) Effect on Income ± Decrease in Revenue b) Effect on Income - Decrease in Revenue c) Effect on Income ± Increase in Revenue d) Effect on Income - Decrease in Revenue
Question 4 Solutions
Statement:- Prestige Data Services should prepare its own cash flow statement . Profit in the month of March. No need to close down the PDS. Balance sheet of both the companies together reqd.
Contd.
Cash Flow Statement
Jan Feb March Net Income (Loss) Add :- Depreciation $(41472) $ 26180 $(40341) $ 26180 $(21438) $ 26180
Cash flow from operating Activities
$(15292)
$(14161)
$ 4742
