Salem Data Services is a problem for Salem Telephone Company. They have consistently brought in a net income loss for January, February, and March. While Salem Data Services’ did better in March and could at least break even if they increased their commercial hours by approximately 30%, breaking even does not show a profitable company.
If Salem Data Services wants to increase 30% of commercial sales, the extra promotion costs cannot exceed $1,549. Considering the promotion cost $8,083 on March, an additional $1,549 is 19.1%. That is, SDS can only increase 19% promotion cost to achieve 30% of growth. Since SDS is essential to keep, the first priority of SDS’ goal is to break even, at least. Cynthia Wu should combine both Flores’ suggestions. Increase the promotion budget and also reduce the price, which will make SDS become profitable in a shorter period of time
The only reason that Salem Data Services would need to continue to exist is to help absorb the impact of the $95,000 leased computer costs that cannot be canceled. If Salem Data Services were to close, liquidate all other company equipment and assets, and stop paying wages and salaries, they would still generate a $95,000 loss each month. This loss would be greater than the losses shown for January -$41,595, February -$40,687, and March -$23,700.
Our recommendation would be to liquidate the assets and close Salem Data Services, if the leased computer equipment cost could be re-allocated inside of Salem Telephone Company. This could mean using the computer equipment inside of Salem Telephone Company or, if possible, leasing the computer equipment out to someone else to help cover costs.
To give a definitive answer on whether Salem Telephone Company should or should not close Salem Data Services, we would need to analyze further projections for all scenarios to determine which outcome projects the least amount of loss at the end of the month. Perhaps the financial results of STC and SDS could be consolidated on a single set of statements. This will provide the most information not only to Flores and Wu, but also to customers, shareholders, and potential investors.