# Extent of competition in the banking industry

## Corporate services — fixed cost

Hourly forces is a variable cost because the cost is dependent upon how many gross hours are worked by the staff. If they sell for 0 hours, there is still a rent disbursal.

Power is a variable cost because the cost is straight related to the figure of hours computing machines were used in operation. The more hours used, the higher the cost of power.

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Rent is a fixed cost because it must be paid no affair how many hours the company is runing. Rent must be paid whether the company is selling or non.

Custodial services is a fixed cost because it is based on Salem Telephone ‘s estimated one-year cost per square pes. It is non dependent on the sum of gross hours.

Computer leases is a fixed cost because it is independent of gross hours. This cost will remain the same regardless of the sum of gross hours.

Care is a fixed cost because it is non dependent on the figure of gross hours.

Depreciation on computing machine equipment does non depend on the sum of gross hours.

Depreciation on office equipment is non dependent upon gross hours.

Salaried staff is paid a salary regardless of the sum of gross hours. The sum the staff is paid is non affected by a alteration in gross hours.

System care is non dependent on the hours of selling

Administration wage is non related to the sum of gross hours.

Gross saless rewards does non depend on the sum of gross hours.

Gross saless publicity does non vary with a alteration in gross hours.

Corporate services is a fixed cost because the sum is non dependent upon the figure of gross hours.

## For each disbursal that is variable with regard to gross hours, calculate the cost per gross hr.

Power cost per gross hr:

January: \$ 1,546/329 hours = \$ 4.70

February: \$ 1,485/316 hours = \$ 4.70

March: \$ 1,679/361 hours = \$ 4.70

Operationss: hourly forces:

January: \$ 7,896/329 hours = \$ 24.00

February: \$ 7,584/316 hours = \$ 24.00

March: \$ 8,664/361 hours = \$ 24.00

Variable costs in entire alteration in direct proportion to alterations in volume of activity but remains changeless per unit when the volume of activity alterations.

**See Exhibit 1

## Assuming the intracompany demand for service will average 205 hours per month, what degree of commercial gross hours of computing machine usage would be necessary to interrupt even each month?

Break-even point = Fixed costs/ CM per unit

Gross saless gross per unit = \$ 82,000/205= \$ 400.00

Variable cost per unit = \$ 9,844.10/343= \$ 28.70

( 205 x \$ 400 + A x \$ 800 ) – 28.70 ten ( 205 + A ) – 212,939 = 0

82,000 + 800A – 28.70A – 5883.50 – 212,939 = 0

-136,822.50 + 771.30A = 0

771.30 A = 136,882.50

A = 177.39

Salem Data Services would necessitate 177.39 commercial hours to interrupt even.

## Estimate the undermentioned consequence on income of each of the options Floes has suggested if Wu estimates as follows:

Increasing the monetary value to commercial clients to \$ 1,000 per hr would cut down demand by 30 % .

Commercial gross hours = 138

With a 30 % lessening in demand, commercial gross hours would be reduced to:

138 ten 30 % = 41.4

138 – 41.4 = 96.6 hours

Gross

Intracompany gross revenues ( 205x \$ 400 ) \$ 82,000

Commercial gross revenues ( 96.6x \$ 1,000 ) 96,600

Less: VC ( 301.60×28.70 ) ( 8,655.92 )

CM 169,944.08

Less: FC ( 212,939 )

Net Income ( \$ 42,994.92 )

This option would ensue in an extra loss of ( \$ 12,611.92 ) go forthing a entire net loss of ( \$ 42,994.92 ) .

Reducing the monetary value to commercial clients to \$ 600 per hr would increase demand by 30 %

Commercial gross hours = 138

With a 30 % addition in demand, commercial gross hours would increase to:

138 ten 30 % = 41.4

138 + 41.4 = 179.4 hours

Gross

Intracompany gross revenues ( 205x \$ 400 ) \$ 82,000

Commercial gross revenues ( 179.4x \$ 600 ) 107,640

Less: VC ( 384.4x \$ 28.70 ) ( 11,032.28 )

CM 178,607.72

Less: FC ( 212,939 )

Net Income ( \$ 34,331.28 )

This option would ensue in an extra loss of ( \$ 3,948.28 ) ensuing in a entire net loss of ( \$ 34,331.28 ) .

Increased publicity would increase gross hours by up to 30 % . Wu is diffident how much publicity this would take. ( How much could be spent and still leave Salem Data Services with no reported loss each month if commercial hours were increased 30 % ? )

Commercial gross hours = 138

Commercial gross hours with a 30 % addition =

138 ten 30 % = 41.4

138 + 41.4 = 179.4 hours

Gross

Intracompany gross revenues ( 205x \$ 400 ) \$ 82,000

Commercial gross revenues ( 179.4x \$ 800 ) 143,520

Less: VC ( 384.4x \$ 28.70 ) ( 11,032.28 )

CM 214,487.72

Less: FC ( 212,939 )

Net Income \$ 1,548.72

The maximal sum that could be spent and still leaves Salem Data Services with no reported loss each month if commercial hours were increased 30 % would be \$ 1,548.72. Salem Data Services spent \$ 8,083 on gross revenues publicity in March. Therefore, a sum of \$ 9,631.72 ( \$ 1,548.72+ \$ 8,083 ) could be spent on gross revenues publicity without incurring a net loss.

## Based on your analysis above, is Salem Data Services truly a job to Salem Telephone Company? What should Flores make about Salem Data Services?

Based on our analysis above, we feel that Salem Telephone Company should maintain Salem Data Services. Although Salem Data Services ‘ fixed costs are really high and net incomes have non been obtained in old periods, Salem Telephone Company should keep Salem Data Services. Exhibit 2 shows that the net loss from February to March decreased \$ 16,987. If Salem Telephone Company were to close down Salem Data Services, the company would salvage a big sum of money in fixed costs but would hold to pass money to do up for the intracompany gross hours.

Salem should maintain Salem Data Services in operations, irrespective of demoing a net loss. If Data Services closed, Salem would incur the undermentioned extra costs:

Purchase of intracompany hours ( at market cost ) : 205 hours ten \$ 800 = \$ 164,000

Fixed costs saved if SDS closed ( March ) :

Rent \$ 8,000

Custodial services \$ 1,240

Maintenance \$ 5,400

Power \$ 1,697

Operationss: salaried staff \$ 21,600

Operationss: hourly forces \$ 8,664

Systems development \$ 12,000

Gross saless \$ 11,200

Promotions \$ 8,083

## Entire nest eggs \$ 86,884

( 205 hours ten \$ 800 ) \$ 164,000 – Purchase of intracompany hours

( \$ 86,884 ) – Savings if Salem Data Servicess closed

\$ 77,116 – Cost nest eggs for operating Salem Data Servicess

In this state of affairs, the benefits outweigh the costs. Salem Telephone Company would be salvaging \$ 86,884 in costs but would hold to buy intracompany hours at \$ 164,000.

Flores should go on to run Salem Data Services ; nevertheless, they should concentrate on methods to cut costs by re-evaluating its labour necessities and increasing consciousness through publicity to increase long-run profitableness. Another facet for Flores to take into consideration is to re-evaluate and forecast commercial gross revenues willingness to pay in order to increase its break-even potency. From the analysis in inquiry five, Flores could cut down the monetary value to commercial clients, thereby increasing demand. Using this scheme in add-on to cutting costs will increase Salem Data Services profitableness.

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