Example of Toll Free Services

Toll Free Services Expense - from Operating Expense Budget

Murray called his local telephone company and discovered a 1-800 line would cost him \$0.30 cents per minute. In order to budget for the toll free service, Murray must estimate 1) the number of callers he expects to have each year and 2) the average number of minutes each caller will stay on the line. Assuming Murray estimates that 1 out of every two people calling will actually purchase, and assuming he expects to sell 4,000 products in his first year of operation, Murray can expect to have 8,000 callers between July 1 and December 31, 200X. Lets further assume, Murray expects the average number of minutes each caller will stay on the line is 4 minutes. As a result, each call will cost Murray \$1.20 (\$0.30 per minute x 4 minutes). If 8,000 individuals call the 1-800 number, Murray's 200X "Toll Free Service Expense" will be \$9,600 ( IE 8000 callers x \$1.20 per call). Therefore, the total "Toll Free Service Expense", appearing on his 200X Forecasted Income Statement, is expected to be \$9,600. For simplicity, Murray decides his 200X Forecasted Cash Flow Statement will show equal payments (Cash Outflows) of \$1,600 each month for Toll-free Services (\$9,600 / 6 months - from July to December).

Since he feels 1 out of every 2 callers will purchase his product, and since he is forecasting 8,000 customers in 200Y, Murray expects to receive 16,000 calls in 200Y. Assuming the cost per caller remains at \$1.20, Murray's total "Toll Free Service Expense", appearing on his 200Y Forecasted Income Statement, will be \$19,200 (IE 16,000 callers at \$1.20 per call). Once Again, Murray decides his 200Y Forecasted Cash Flow Statement will show equal payments (Cash Outflows) of \$1,600 each month for Toll-free Services (\$19,200 / 12 months).

Categories: Forecasting