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NEW Prestige SEMI-Final oct 17, 2014.docx

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I. SUMMARY OF THE CASE Prestige Telephone Company is a public utility business. Since it is operated as a public utility, it is subject to the regulations of the Public Service Commission, as such, the rates charged by Prestige Telephone Company for telephone service could not be changed without the approval of the Public Service Commission. The state Public Service Commission had encouraged all public utilities under its jurisdiction to seek new sources of reven
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  I.   SUMMARY OF THE CASE Prestige Telephone Company is a public utility business. Since it is operated as a public utility, it is subject to the regulations of the Public Service Commission, as such, the rates charged by Prestige Telephone Company for telephone service could not be changed without the approval of the Public Service Commission. The state Public Service Commission had encouraged all public utilities under its jurisdiction to seek new sources of revenue and profits as a step toward deregulation and to reduce the need for rate increase, which higher costs would otherwise bring. In 1995, The Prestige Data Services started its operation as a subsidiary of Prestige Telephone Company. It is established to perform data processing for the parent company and to sell computer service to other companies and organizations. From the start of its operation, Prestige Data Services experienced several problems, to wit; delayed deliveries of equipment, personnel commanded higher salaries and most importantly, customers were lesser than the earlier estimates. By the end of 1996, the company had a very low income that revealed the lowest Return on Investment in seven years. Because of this, Daniel Rose, the president of Prestige Telephone Company, felt it was time to reassess Prestige Data Services. The reports for the quarter revealed a persistent problem; available hours, which were unprofitable, remained HIGH. Revenue and cost data were summarized in the quarterly report on results of operation. Intercompany work was billed at $400 per hour, a rate based on usage estimates for 1997 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. Rose reminded himself of the characteristics of a few expenses such as Space rent costs & the Charge for Custodial Service based on estimated annual cost per square foot were all paid to Prestige Telephone. 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 four different kind of activities; Operations, Systems Development & Maintenance, Administration and Sales. The Prestige Data Services was able to avoid many costs like payroll, billing, collections and accounting since these were done by telephone company personnel. On the other hand, for those corporate services, Prestige Data paid Prestige Telephone based on wages and salaries each month. Although Rowe was disappointed by the recent reports, he was reluctant to suggest to Bradley that Prestige Data Services be closed down or sold for three reasons; The idea behind subsidiary just seemed too good to give up easily, he was not sure that the accounting report really revealed the contribution that Data Services was making to Prestige Telephone and he felt that the procedures used in accounting for separate activities in the company tended to obscure the costs and benefits provided. II.   Statement of the Problem: Does the operations of the subsidiary- Prestige Data Services cause a real problem on the  performance of the Prestige Telephone Company? Should Prestige Telephone Company continue the operations of the subsidiary? III.   Objectives: 1. To use the principles in cost behavior in relation to differential costing to determine the actual cost and benefits of the subsidiary. 2. Using Financial Analysis Tools and Methods, decide whether to shut-down the operations of the subsidiary by the end of 1997. 3. To identify the areas for improvement in the operations of Prestige Data Services as to realize an income of at least $50,000.00 from its operations by the end of 1997. Areas of Consideration: External: 1. Subject to regulations of Public Service Commission     Because it operated as a public utility, the rates charged by Prestige Telephone Company for telephone service could not be changed without the approval of the Public Service Commission.    Public Service Commission had encouraged all public utilities under its jurisdiction to seek new sources of revenue and profits as a step toward deregulation and to reduce the need for a rate increase which higher cost would otherwise bring. Industry and Operating Environment: 1. The telecommunications industry    As one of the companies in the telecommunications industry, Prestige Telephone is operating as a public utility company which are concerned on how to reduce the pressure for telephone rate increases. 2. Competitors    Prestige could compete with other computer service organizations in a dynamic field; in addition, revenues for use of telephone services might also be increased 3. Return of Investment for Shareholders    In 1996, the company had a very low income that revealed the lowest return on Investment in seven years. Because of this, the president of Prestige Telephone Company, Daniel Rose felt it was time to reassess Prestige Data Services.    The lowest Return on Investment happened after one year of operations of the Prestige Data Services. Since the operations started in 1995 and the low ROI happened in 1996. At this stage, the subsidiary is only at the starting phase of its business life. 4. Financial Management    A review on the financial report should be done to assess the presentation of financial data.    The president was not sure that the accounting report really revealed the contribution that Data Services was making to Prestige Telephone. 5. Cost Considerations    Cost of outsourcing Data services from other service providers will be higher as the market value for this kind of services is at $800.00 compared to the $400.00 cost that Prestige Telephone is paying to Data Service.    Opportunity Cost will include the saving that the parent company is having from the service of its subsidiary. It also include the contribution margin that the subsidiary is  contributing to shoulder the its fixed cost that would otherwise be carried by its parent if they choose to shutdown the subsidiary's operation.    Cost of the remaining amortization of the non-cancellable lease IV.   Alternative Courses of Action: STRENGHTS WEAKNESS    Supplier of Data Services in the metropolitan region    Additional revenue source    Subsidiary is not entirely subject to regulations of PSC, especially on rates    Losses from Subsidiary    Lowest ROI for shareholders    Too much unused available time    Presentation of Financial Reports    employees grievances on their salary and schedule OPPORTUNITIES THREATS    Improvement of Marketing for Subsidiary    Partnership with competitors    Increase in rates price rates for subsidiary    Improvement of Services    Innovation of competitors    More restrictions on rates by PSC SWOT Analysis: Strengths and Opportunities to Weakness: 1. To avoid losses from the operations of the subsidiary, the company should consider the  possible improvements in its Service. Additional Marketing efforts for the subsidiary should be done to minimize if not eliminate the unused available time for services. 2. Since the report of lowest ROI for shareholders was due to the losses incurred, realizing a net income from operations will solve this particular weakness. Also, after improving its operations

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Jul 23, 2017
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