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 ...view middle of the document...
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?
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:
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.
* 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...