Question

Cumberland County Senior Services is a non-profit organization devoted to providing essential services to seniors who live in their own homes within the Cumberland County area. Three services are provided for seniors—home nursing, Meals on Wheels, and housekeeping. In the home nursing program, nurses visit seniors on a regular basis to check on their general health and to perform tests ordered by their physicians. The Meals on Wheels program delivers a hot meal once a day to each senior enrolled in the program. The housekeeping service provides weekly housecleaning and maintenance services. Data on revenue and expenses for the past year follow:

	Total			Home Nursing			Meals on Wheels			House- keeping
Revenues	$	945,000		$	273,000		$	420,000		$	252,000
Variable expenses		518,500			127,000			222,500			169,000
Contribution margin		426,500			146,000			197,500			83,000
Fixed expenses:
Depreciation		69,900			8,400			40,750			20,750
Liability insurance		43,850			20,750			7,500			15,600
Program administrators’ salaries		118,250			41,250			38,750			38,250
General administrative overhead*		189,000			54,600			84,000			50,400
Total fixed expenses		421,000			125,000			171,000			125,000
Operating income (loss)	$	5,500		$	21,000		$	26,500		$	(42,000	)

*Allocated on the basis of program revenues.

     The head administrator of Cumberland County Senior Services, Judith Ewa, is concerned about the organization’s finances and considers the operating income of $5,500 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, Ewa asked for more information about the financial advisability of discontinuing the
housekeeping program.

     The depreciation in the housekeeping category 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. Depreciation charges assume zero salvage value. 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. Compute the change in net operating income for the company as a whole if housekeeping program be discontinued.

	in net operating income by

1-b. Should the housekeeping program be discontinued?

• Yes

• No

2. 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

1a
	Current Total	Total If house keeping is Dropped	Difference: Net Operating Income
Sales	945000	693000	-252000
Variable expenses	518500	349500	169000
Contribution margin	426500	343500	-83000
Fixed expenses:
Depreciation	69900	69900	0
Liability insurance	43850	28250	15600
Program administrators’ salaries	118250	80000	38250
General administrative overhead	189000	189000	0
Total fixed expenses	421000	367150	53850
Net operating income (loss)	5500	-23650	-29150
Decrease in net operating income by 29150
1b
No, the housekeeping program should not be discontinued
2
	Total	Home nursing	Meals on Wheels	House Keeping
Sales	945000	273000	420000	252000
Variable expenses	518500	127000	222500	169000
Contribution margin	426500	146000	197500	83000
Traceable fixed expenses:
Depreciation	69900	8400	40750	20750
Liability insurance	43850	20750	7500	15600
Program administrators’ salaries	118250	41250	38750	38250
Total traceable fixed expenses	232000	70400	87000	74600
Program segment margins	194500	75600	110500	8400
General administrative overhead	189000
Net operating income (loss)	5500
Yes, a segmented income statement would be more useful to management in assessing the long-run financial viability of the various services