Salem Telephone Company Case

Flores needs to address the elephant in the room which is Salem Telephone Company created Salem Data Services with the hopes it would reduce pressure for telephone rate increases, but essentially burdened a start-up with high fixed costs and revenue constraints that ultimately limit the company’s potential. Ultimately, Flores may need to go back to the Public Service Commission and increase telephone rates, however, he still has a viable solution in Salem Data Services.

With that said, Flores should exhaust all possible options before increasing the cost of a public utility. If I were Flores, one area in particular I would focus is the contractor who takes the computer off-line for eight hours each week for testing and provides routine maintenance of the computers and upkeep during the weekend shifts which is not used for commercial customers. This is potentially lost revenue of $6.4k per week since commercial hours are billed at $800/hour. With 13 weeks per quarter that’s $83.2k in revenue and only ~$3k in variable costs. Thus, commercial sales would generate a net loss of $27k without the intracompany sales. Next, I would start scrutinizing my fixed costs that are burdening Salem Data Services. In the first three months of 2004 Salem Data Services lost ~$106k of which 65%, or ~$69k of the loss is attributed to sales promotions and corporate services. In addition, the company is paying $21,600 for salaried staff that could potentially be converted to a lower hourly rate personnel. There is also potential to reduce the computer lease costs by purchasing more equipment and depreciating it over the useful life.

If Flores did nothing I think Salem Telephone Company would inevitably have to increase rates on telephone costs. However, Salem Data Services may potentially workout once other companies become more aware of the services they can offer and their revenue increases. As it currently stands, Commercial sales covers roughly 50%, or ~$107k of the fixed costs at March’s 138 revenue hours.

As previously mentioned, Salem Telephone formed Salem Data Services to reduce pressure for telephone rate increases. In addition, the company was established to perform data processing for the telephone company and to sell computer service to other companies and organizations. The Public Service Commission encouraged Salem Telephone to seek additional streams of revenue which SDS has been able to achieve. Ultimately, at this point SDS has been a drain on Salem Telephone’s resources, however it has not had to increase rates yet and therefore is moderately successful.