Prestige Telephone Company Essay

1.Identify the constitutes that be pertinent to the psychoanalysis to break out prestige selective information operate applicable cost in the analysis by prestigiousness knell ac c on the wholeer-out decision to discontinue prestige info function include resolved be which must be absorbed by the refer company (prestige Telephone) upon turf out voltaic pile outstanding prestige data serve well debts cost of develop retained employees costs associated with outsourcing data returnss previously provided by prestige data Services opportunity cost of using space rented to prestigiousness data Services marketing costs attributed to acquiring additional prestigiousness selective information Services customers costs of increasing promotional activities of prestige Data Services. In addition, prestigiousness Telephone Company should consider the qualitative cost of reduced employee morale which may result upon shut toss take out of Prestige Data Services.Maintenance costs2.Justify why each of the costs in tip 1 is relevantThe costs listed above ar all relevant because they each vary with the shut trim decision. Fixed costs which must be absorbed by the p atomic number 18nt company (Prestige Telephone) upon shutdown Payroll, billing, collections, and other corporeal serves were provided by Prestige Telephone in return for an essence from Data Services based on wages and salaries. These fixed costs allocated to Prestige Data Services must now be accounted for by the parent company. Costs of retraining employees If employees are retained by Prestige Telephone, wages and salaries that were previously incurred by the Data Services line volition hit Prestige Telephones budget. Also, new skills lead be required of employees retained by the company as well as accompanying training expenses. Costs associated with outsourcing data services previously provided by Prestige Data Services Prestige Telephone result sleek over require the services Pre stige Data Services supply and thereof will need to outsource them. Since Prestige Telephone was using a price cap based on estimated data usage in 1999, they were numberively getting discounted data service rates from the adjuvant. If Data Services is shut down, the company might incur much higher service expenses. The maintenance cost is relevant because if Data Services isshut down the company will no longer incur this costs, therefore it needfully to be considered as a cost the parent company foundation eliminate. Opportunity cost of using space rented to Prestige Data Services If Prestige Telephone decides to shut down the Data Services Company, the parent company will lose the $8000 monthly rental fee paid by the current subsidiary. Additionally, Prestige Telephone must consider the opportunity cost of renting the space to a nonher company or service that may provide them with more income. If Prestige Data Services is shut down, marketing costs attributed to acquiring a dditional Prestige Data Services customers and promotional activities will no longer be necessary. Termination of Prestige Data Services employees as a result of shut down may reduce the morale of any retained employees or employees of the parents company. Prestige might experience decreased productivity or increased employee turnover as a result.3.Identify the costs that are NOT relevant to the analysis to discontinuePrestige Data Services Costs not relevant to the decision are sunk costs such as the costs of training Prestige Data Service employees, investments in the IT infrastructure, and any possess Prestige Data Services Equipment. In addition, the fixed portion of the electrical energy costs is not relevant. Depreciation costs are also not relevant. The leases for computer equipment are non-cancelable and therefore may be considered sunk costs because Data Services is expected to cover the costs associated with the leases prior to be shutdown. However if Prestige Data Serv ices is unable to pay off the leases, these costs will become relevant because the parent company, Prestige Telephone would be responsible for debts owed.4.Justify why each of the costs in pointedness 3 is NOT relevantFixed cost Costs of equipment and fixtures are incurred whether or not Prestige Data Service continues to operate. Even if the subsidiary company is shut down, these fixed costs must still be taken into consideration. Some costs, such as electricity, whether used or not, will be charged for a certain basic amount all month and therefore should not be considered relevant. Depreciation is not relevant because cost of equipment is a sunk cost. There is no significant make unnecessary value for the equipment.5.Identify the receiptss that are relevant to the analysis to discontinue Prestige Data Services Revenues relevant to the analysis to discontinue the operation are mercantile sales revenue which includes computer use and other.6.Justify why the revenues in degree 5 are relevantThe revenues in occurrence 5 disagree across alternatives. In other words, these revenues are directly tied to Prestige Data Services. If the turnout capacity of Prestige Data Services decreases to zero, all the revenue resulting from these operations will also decrease to $0, which decreases the subsidiarys contribution to its parent company.7.Identify the revenues that are NOT relevant to the analysis to discontinue Prestige Data Services. The revenue of Prestige Telephone and the revenue from intercompany gross sales are not relevant to the decision.8.Justify why the revenues in item 7 are NOT relevant.As we explained in item 6, all revenues from Prestige Data Services will change depending on the decision. As the production capacity is varied, all the revenues will vary. These changes show the expected overall effect on net income. Revenue at Prestige Telephone will not vary based on the decision to shut down Prestige Data Services because Prestige Telephones revenue is not tied to the operations of the subsidiary. From the perspective of the Parent Company, Intercompany Sales are a revenue stream for the subsidiary, but an equal cost to the Parent, thus it doesnt affect the balance sheet of the parent company. 9.Is Prestige Data Services really a problem to the parent company. Justify your answer. Prestige Data Service is not a problem to the parent company. This is earlier becausePrestige Telephone will need to absorb Prestige Datas relevant fixed costs.Prestige Telephone will be possessed of to pay higher rates for services previously provided by Prestige Data Services. Regardless of possible sunk costs such as equipment leases ($95,000), Prestige Data Service positively contributes to the parent company. Additionally, if Prestige Data Services were to charge Prestige Telephone the same rates ($800 per service hour) it charges for commercial services, the company would not be operatingat a loss. If these commercial rates are conside red competitive then the subsidiary is economic system its parent money.Furthermore, there are several strategies that can be employ to increase the business value of Prestige Data Services, such as reducing computer usage.10.Prepare monthly income statements for January, February, and March which support your answer to item 9.