1. PRESTIGE TELEPHONE COMPANY Presented by:- Md. Ashraf Ansari Manaswini Mohanta Niladri Patnaik GROUP NO.-- 5 Neha Kumari Munawwar Alam

2. 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.

3. 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.

4. 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

5. 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.

6. FIXED COST & VARIABLE COST

7. 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

8. 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.

9. 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)

10. 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

11. 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 )

12. 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