You work in the Strategy Analysis department of On-Call, a worldwide paging firm offering satellite- based digital communications through sophisticated pagers. On-Call is analyzing the possibility of acquiring AtlantiCom, an East Coast paging firm in Maine.
AtlantiCom’s latest quarterly report disclosed an unfavorable volume variance of $1.3 million. The engineering staff of On-Call, familiar with AtlantiCom’s network, estimates that AtlantiCom has quarterly fixed overhead costs of $6.5 million that can deliver 800,000 message packets per quarter. A message packet is the industry standard of delivering a fixed amount of digital information within a given time period.
In valuing AtlantiCom, senior management at On-Call wants to know whether AtlantiCom has excess capacity, and, if so, how much.
Required:
As a percentage of AtlantiCom’s current capacity of 800,000 message packets, estimate AtlantiCom’s over- or undercapacity last quarter. Assume that the quarterly fixed overhead costs of $6.5 million approximate budgeted fixed overhead and that actual and standard volumes are the same.
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