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Using unit-level analysis-telephone cost structure
Course:- Financial Management
Reference No.:- EM131352370




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Homestead Telephone was formed in the 1940s to bring telephone services to remote areas of the U.S. Midwest. The early equipment was quite primitive by today’s standards. All calls were handled manually by operators, and all customers were on party lines. By the 1970s, however, all customers were on private lines, and mechanical switching devices handled routine local and long distance calls. Operators remained available for directory assistance, credit card calls, and emergencies. In the 1990s Homestead Telephone added local Internet connections as an optional service to its regular customers. It also established an optional cellular service, identified as the Home Ranger Required

a. Using a unit-level analysis, develop a graph with two lines, representing Homestead Telephone’s cost structure (1) in the 1940s and (2) in the late 1990s. Be sure to label the axes and lines.

b. With sales revenue as the independent variable, what is the likely impact of the changed cost structure on Homestead Telephone’s (1) contribution margin percent and (2) breakeven point?

c. Discuss how the change in cost structure affected Homestead’s operating leverage and how this affects profitability under rising or falling sales scenarios.

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