Question

Jackson County Senior Services is a nonprofit organization devoted to providing essential services to seniors who live in their own homes within the Jackson County area. Three services are provided for seniors—home nursing, Meals On Wheels, and housekeeping. Data on revenue and expenses for the past year follow:

		Total		Home Nursing		Meals On Wheels		House- keeping
Revenues	$	926,000	$	266,000	$	407,000	$	253,000
Variable expenses		468,000		115,000		202,000		151,000
Contribution margin		458,000		151,000		205,000		102,000
Fixed expenses:
Depreciation		69,600		8,900		40,500		20,200
Liability insurance		43,700		20,500		7,800		15,400
Program administrators’ salaries		114,900		40,400		38,700		35,800
General administrative overhead*		185,200		53,200		81,400		50,600
Total fixed expenses		413,400		123,000		168,400		122,000
Net operating income (loss)	$	44,600	$	28,000	$	36,600	$	(20,000)

*Allocated on the basis of program revenues.

The head administrator of Jackson County Senior Services, Judith Miyama, is concerned about the organization’s finances and considers the net operating income of $44,600 last year to be razor-thin. (Last year's results were very similar to the results for previous years and are representative of what would be expected in the future.) She feels that the organization should be building its financial reserves at a more rapid rate in order to prepare for the next inevitable recession. After seeing the above report, Ms. Miyama asked for more information about the financial advisability of perhaps discontinuing the housekeeping program.

The depreciation in housekeeping is for a small van that is used to carry the housekeepers and their equipment from job to job. If the program were discontinued, the van would be donated to a charitable organization. None of the general administrative overhead would be avoided if the housekeeping program were dropped, but the liability insurance and the salary of the program administrator would be avoided.

Required:

1-a.	What is the impact on net operating income by discontinuing housekeeping program?

	Total If Difference: Net Operating Current Total Housekeeping Is Dropped Income Increase or (Decrease) Revenues Variable expenses Contribution margin Fixed expenses: Depreciation Liability insurance Program administrators’ salaries General administrative overhead Total fixed expenses Net operating income (loss)

1-b.	Should the housekeeping program be discontinued?
	Yes No

2-a.	Prepare a segmented income statement.

	Home Nursing Meals On Wheels House keeping Totals Revenues Variable expenses Contribution margin Traceable fixed expenses: Depreciation Liability insurance Program administrators’ salaries Total traceable fixed expenses Program segment margins General administrative overhead Net operating income (loss)

2-b.	Would a segmented income statement format be more useful to management in assessing the long-run financial viability of the various services.
	Yes No

Answer 1

Solution 1a:

Computation of Financial Advantage (Disadvantage) of discontinuing House-keeping Program
Particulars	Current Total	Total if Housekeeping is dropped	Difference: Net Operating income Increase (Decrease)
Revenues	$9,26,000	$6,73,000	-$2,53,000
Variable expenses	$4,68,000	$3,17,000	-$1,51,000
Contribution Margin	$4,58,000	$3,56,000	-$1,02,000
Fixed Expenses:
Depreciation	$69,600	$69,600	$0
Liability Insurance	$43,700	$28,300	-$15,400
Program administrators' salaries	$1,14,900	$79,100	-$35,800
General administrative overhead	$1,85,200	$1,85,200	$0
Total Fixed Expenses	$4,13,400	$3,62,200
Net Operating Income (Loss)	$44,600	-$6,200	-$50,800

Solution 1b:

No, the housekeeping program should not be discontinued.

Solution 2a:

Segmanted Income Statement - Jackson Country Senior Services
Particulars	Total	Home Nursing	Meals on Wheels	House-Keeping
Sales	$9,26,000	$2,66,000	$4,07,000	$2,53,000
Variable expenses	$4,68,000	$1,15,000	$2,02,000	$1,51,000
Contribution margin	$4,58,000	$1,51,000	$2,05,000	$1,02,000
Traceable Fixed Expenses:
Depreciation	$69,600	$8,900	$40,500	$20,200
Liability Insurance	$43,700	$20,500	$7,800	$15,400
Program administrators' salaries	$1,14,900	$40,400	$38,700	$35,800
Total Tracable Fixed Expenses	$2,28,200	$69,800	$87,000	$71,400
Product Line segment margin (loss)	$2,29,800	$81,200	$1,18,000	$30,600
General administrative overhead	$1,85,200
Net Operating Income (Loss)	$44,600

Solution 2b:

Yes, a segmented income statement format would be more useful to management in assessing the long-run financial viability of the various services.