Jennifer Smith 4/9/11 Salem Telephone Company An agreement with the state Public Service Commission had permitted Salem Telephone to establish Salem Data Services (SDS), to perform data processing for the telephone company and to sell computer service to other companies and organizations. Issue: SDS failed to met profit expectations and in continued to experience losses at the rate of $40-$45k per month. Based on the amount of unsold monthly computer hours, Salem Data has about $190k of revenue potential from the commercial sales. While providing services to both internal and external customers, SDS found that their computer system had extra capacity and was able to support additional sales. With increasing pressure from shareholders and low financial performance, Salem Telephone reexamined the current business model for SDS. However, their ability to reduce costs is limited because a majority of expenses are fixed. Fixed costs included rent, custodial services, computer leases, equipment maintenance, depreciation, power, system development/maintenance, and employee salaries. Variable costs include hourly wages and sales promotion since they depend on the amount of business. Analysis * The portion of expenses that are fixed costs versus variable costs are unbalanced. During first quarter SDS reported 90% of accrued costs were fixed with the remaining being variable. *The ratio of computer hours available to the number of computer hours used. The company is averaging about 60% utilization of available hours. * The commercial sales opportunities are underutilized and needs to be a focus to driving commercial sales. Decision: *There is a possibility for Salem Data Services to be profitable. Shutting down the division at this stage would bee too soon and the organization needs to re-visit the promotion and sales strategy to focus on increasing sales and efficiency. *The variable costs averaging $32,640 over the first quarter is not sufficient to overcome the current fixed costs which equal $189,620. The company could review the salaries for the sales division and create a pay structure that is tied to revenue and sales. *Sales promotion can also be tied to sales or revenue to convert these to variable costs. * Commercial demand may need to be re-assessed to determine if there is market to serve.