Prestige Telephone Company
Liam Hennessy, Xinyi Zhang, Yuan Chai, and Anthony Saba
1. Reasons for Continuing Losses
Prestige Data Services’ main problem is that they have too many available hours that are not generating any revenue. In the first quarter of 2003, they have an average of 176 available hours per month of available hours. Its operations exact a huge amount of fixed costs to cover. If they could find more commercial customers for the available capacity, they could increase their commercial sales revenue by as much as $140,880 (176*800). In addition, they are also creating unnecessary expenses by having to pay all kinds of expenses during these unprofitable hours.
2. Breakeven Point of Commercial Sales …show more content…
You would also have to also continue to pay the non-cancelable computer equipment that was acquired by lease. Wages and salaries expenses would be eliminated but the company would have to take into consideration the expense of a severance package for employees who would qualify for a package of this type. The corporate services that Prestige Date Services received from the parent company will no longer be need. This will have a direct impact on Prestige Telephone Company. They could reduce employees needed by the parent company but again they would have to take into consideration a severance package. The revenue would be lost from dropping this subsidiary but maybe they could profit by transferring their commercial sales to another data service company by selling their list of customers.
According to the facts presented in the case, we prepare in the following a comparative income statement to show the effect of “Keep” or “Drop” of Prestige Data Services on the overall income or loss of both company as a whole:
| | Drop | Keep | Difference | Revenues | | | | | | Total Revenue | 0 | 591,910 | (591,910) | | Expenses | | | | | | Space costs | 27,720 | 27,720 | 0 | | Rent | 24,000 | 24,000 | 0 | | Custodial services | 3,720 | 3,720 | 0 | | | Equipment costs | 285,000 | 301,200 | 16,200 | | Computer leases | 285,000 | 285,000 | 0 | | Maintenance | 0 | 16,200 | 16,200 | | | | |