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Managerial Accounting
Case Studies Ch. 16 – 2
Presented by:
Group 1
Prestige Telephone
Company
1.) Identify the costs that are relevant to the analysis to
3 discontinue Prestige Data Services:
- Fixed Costs which must be absorbed by the parent co. (Prestige Telephone) upon
shutdown: Payroll, billing, collections, and other corporate services were provided by
Prestige Telephone in return for an amount 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 associated with outsourcing data services previously provided by Prestige Data
Services: Prestige Telephone will still require the services Prestige Data Services supply, thus will
need to outsource them. Since Prestige Telephone was using a price cap based on estimated
data usage in 1999, they were effectively getting discounted data service rates from the
subsidiary. If Data Services is shut down, the company might incur much higher service
expenses.
- The maintenance cost is relevant because if Data Sevices is shut down the company will no
longer incur this costs, thus it needs to be considered as a cost the parent company can
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 $8,000.00
monthly rental fee paid by the current subsidiary. Additionally, Prestige Telephone must consider
the opportunity cost of renting cost of renting the space to another company or service that may
provide them with more income.
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3.) Identify the costs that are NOT relevant to the analysis to discontinue Prestige
Data Services:
Costs not relevant to the decision are sunk costs such as the costs of training
Prestige Data Services employees, investments in the IT infrastructure, and any
owned Prestige Data Services Equipment. In addition, the fixed portion of the
electricity 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 because Data Services is expected to cover the
costs associated with the leases prior to being shutdown. However if Prestige Data
Services is unable to pay off the leases, these costs will become relevant because
the parent company, Prestige Telephone would be responsible for debts owed.
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Fixed 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 every month and therefore should not be considered
relevant.
Prestige Data Services
Income Statement
For the months ended January 31, February 28 and March 31, 2003
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Revenues January February March
Intercompany sales $ 82, 400.00 $ 72, 400.00 $ 89, 200.00
Less: Variables
Costs
Power $ 1, 633.00 $ 1,592.00 $ 1, 803.00