Prestige Telephone Company – Case Study

In April 2003, Daniel Rowe, president of Prestige Telephone Company, was preparing for a meeting with Susan Bradley, Manager of Prestige Data Services, a company subsidiary. Partial deregulation and an agreement with the state Public Service Commission had permitted Prestige Telephone to establish a computer data service subsidiary to perform data processing for the telephone company and to sell computer service to other companies and organizations. Mr. Rowe had told the commission in 1999 that a profitable computer services subsidiary would reduce pressure for telephone rate increases. However, by the end of 2002 the subsidiary had yet to experience a profitable month. Ms. Bradley felt only more …show more content…

Revenue and cost data were summarized in the quarterly report on results of operations (Exhibit 2). Intra-company work was billed at $400 per hour, a rate based on usage estimates for 2000 and the Public Service Commission's restrictions that cost to Prestige Telephone should not exceed an average of $82,000 per month. Commercial sales were billed at $800 per hour.

While most expenses summarized in the report were self explanatory, Rowe reminded himself of the characteristics of a few. Space costs were all paid to Prestige Telephone. Prestige Data Services rented the ground floor of a central exchange building owned by the company for $8,000 per month. In addition, a charge for custodial service based on the estimated annual cost per square foot was paid by Data Services, as Telephone personnel provided these services.

Computer equipment had been acquired by lease and by purchases; leases had four years to run and were non-cancelable. Owned equipment was all salable but probably could not bring more than its book value in the used equipment market.

Wages and salaries were separated in the report to show the expense of four different kinds of activities. Operating salaries included those of the six persons necessary to run the center around the clock well as amounts paid hourly help who were required when the computer was in operation. Salaries of the programming staff who provided service