Prestige Telephone Company

Introduction
 Prestige Data Services (PDS) was a subsidiary of Prestige
Telephone (PT) Company.
 PDS - Data processing for the telephone companies & sold
computer services to other companies.
 Yet to experience profit.
 Manager -More time required for business to become
profitable.
 President - Reduce the drain in company resources.
Objectives
 Analyze the results of operations.
 Understand the economics of a business.
 Forecast the potential change in income with each alternative
solution.
 Understand cost information reporting.
Issues
 To continue or stop Prestige Data Services operation or
separate as stand-alone entity from parent company since it is
not generating profit.
 Consider changes in pricing or promotion that might improve
profitability.
 Reduce company resources wastage if any.
 Reduce service hour from 24 hour to 2 shift per day.
Question1 Solution
 Non-cancelable leases on computer equipment have
four more years to run.
 If Prestige shuts down the subsidiary it needs to
outsource data services from an outside vendor
almost double the cost to present system.
 Add back the depreciation (non-cash) the net loss
convert into profit in the month of March.
 $800 per hour is acceptable price.
Contd.
 Opportunity costs rather than reported or historical
costs should be used. And Prestige Data Services is
not really a problem to Prestige Telephone Co.
 Reported cost includes total cost i.e. variable cost
and fixed cost. But in decision making only variable
cost will be considered.
 Reported Cost $ 160413
 Relevant Cost $ 61860
Question 2 Solution
 Break Even Point- Total Cost = Total Revenve

January February March

231513 – 82000 229925 – 82000 233723-82000

$800 $800 $800

= 187 hours 185 Hours 163 Hours

Question 3 Solution
a) Effect on Income – Decrease in Revenue

b) Effect on Income - Decrease in Revenue

c) Effect on Income – Increase in Revenue

d) Effect on Income - Decrease in Revenue

Question 4 Solutions
 Statement:- Prestige Data Services should
prepare its own cash flow statement .
 Profit in the month of March. No need to
close down the PDS.
 Balance sheet of both the companies together
reqd.
Contd.
Cash Flow Statement
  Jan Feb March

Net Income (Loss) $(41472) $(40341) $(21438)

Add :- Depreciation $ 26180 $ 26180 $ 26180

Cash flow from operating Activities $(15292) $(14161) $ 4742