Susan looked at her long-distance telephone bill with dismay. After leaving her job last year to become a self-employed consultant, her long-distance charges had grown considerably. She had not changed long-distance plans for years, partly because she hated taking the time to review the range of service providers and plans. However, the size of her long-distance bill made it clear that it was time to make a change. She had recently seen numerous ads by telephone companies offering much lower rates than she was currently paying, but she was sure that at least some of those plans offered low rates only for night and weekend calls.
Susan called her current long-distance service provider and asked how she could obtain a lower rate. She mentioned hearing that a competitor was currently offering long distance at 5¢ per minute.
In responding to the service representative’s questions, Susan verified that most of her long-distance calls are weekday and out of state. She also agreed that her activity over the past two months—approximately 500 minutes of long distance per month—was her best estimate for future calling activity. Given this information, the service representative suggested that Susan buy the following long-distance service plan:
1. Up to 500 minutes of long distance for a flat fee of $20 per month.
2. No refunds would be provided for usage less than 500 minutes per month.
3. Any minutes over 500 per month would be billed at 10¢ per minute.
4. No service change fee or cancellation fee would apply.

A. What is the cost driver for Susan’s long-distance telephone costs, assuming that the cost object is her consulting business?
B. In the proposed service plan, which of the costs are fixed and which are variable? Explain.
C. Would regression analysis be an appropriate tool for Susan to use in deciding whether to buy the new service plan? Why or why not?
D. Is the cost of Susan’s current long-distance service plan relevant to this decision? Why or why not?
E. Explain why Susan cannot be certain whether the new service plan will reduce her long-distance costs.
F. List additional information that might be relevant to Susan in deciding whether to buy the new service plan.
G. Are Susan’s long-distance services most likely a discretionary cost? Explain.
H. Are Susan’s long-distance services most likely a direct or indirect cost, assuming that the cost object is an individual consulting job? Explain.
I. Describe the pros and cons of the new service plan.

  • CreatedJanuary 26, 2015
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