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: Home Total Nursing $ 927,000 $264,000 477,000 117,000 450,000 147,000 Meals On House- Wheels keeping $407.000 $256.000 205,000 155,000 202.000 101.000 Revenues Variable expenses Contribution margin Fixed expenses: Depreciation Liability insurance Program administrators' salaries General administrative overhead Total fixed expenses Net operating income (loss) 69.700 43,600 115,200 185.400 413,900 $ 36,100 8,600 20,400 40,500 52.800 122,300 $ 24,700 40.400 20.700 7,800 15,400 38,700 36,000 81.400 31.400 51,200 168,300 123,300 $ 33,700 $(22,300) *Allocated on the basis of program revenues. The head administrator of Jackson County Senior Services, Judith Miyama..considers last year's net operating income of $36,100 to be unsatisfactory; therefore, she is considering the possibility of 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 financial advantage (disadvantage) of discontinuing the Housekeeping program? 1-b. Should the Housekeeping program be discontinued? < Prev 5 of 7 !!! Next >

Answer 1

while making decision of shutdown vs carry on only the avoidable costs are relevant.

Fixed costs which are unavoidable will occur in both the situation so they are irrelevant.

here the relevant costs are variable expenses.

Depreciation on VAN is sunk cost. so it is not relevant in decision making. general administrative overhead is allocated and none would be avoidable if program is dropped, so it is not relevant as it will occur in any situation.

(1) financial advantage (disadvantage)of discontinuing housing program

	current total	Total if housekeeping is dropped	difference in net operating income increase(decrease)
Revenue	$927,000	$671,000[927000-$256,000]	($256,000)[927000-671000]
variable expense	$477,000	$322,000[477000-155000]	$155,000[477000-322000]
contribution margin	$450,000	$349,000	$101,000
fixed expense
depreciation	$69,700	$69,700	$0
liability insurance	$43,600	$28,200[43600-15400]	$15,400[43600-28200]
program administrator salaries	$115,200	$79,200[115200-36000]	$36,000[115200-79200]
general administrative overhead	$185,400	$185,400	$0
Total fixed expenses	$413,900	$362,500[69700+28200+79200+185400]	$158,800 [413900-255100]
Net operating income (Loss)	$36,100	-$13,500 [349000-362500]	-$49,600

As we can see that if the housing program is dropped net income will decrease by $49,600

1b. No, housekeeping program should not be dropped as it will result in decrease in net income by $49,600

2A.PROPERLY FORMATTED SEGMENT INCOME STATEMENT

	TOTAL	HOME NURSING	MEASL ON WHEELS	HOUSE KEEPING
Revenues	$927,000	$264,000	$407,000	$256,000
variable expense	$477,000	$117,000	$205,000	$155,000
contribution margin	$450,000	$147,000[264000-117000]	$202,000[407000-205000]	$101,000 [256000-155000]
traceable fixed expenses
depreciation	$69,700	$8,600	$40,400	$20,700
liability insurance	$43,600	$20,400	$7,800	$15,400
program administrative salaries	$115,200	$40,500	$38,700	$36,000
Total traceable expenses	$228,500[69700+43600+115200]	$69,500[8600+20400+40500]	$86,900[40400+7800+38700]	$72,100[20700+15400+36000]
program segment margins	$221,500[450000-228500]	$77,500[147000-69500]	$115,100[202000-86900]	$28,900[101000-72100]
general administrative overheads	$185,400
Net operating income(loss)	$36,100

2b. segmented income statement is a tool used to analyze the income from different segments or goods.

segment margin is a measure of profitability that applies to individual service lines. it does not allocate general administrative overhead to segments but is deducted from total expenses.

segmented margin income statement helps management in taking better decisions as they show correct picture of segment margin. allocated overheads are general expenses that cannot be controlled by product lines so they are not deducted from segment margin.

so, yes segmented margin income statement is more useful to management in assessing long run financial viability of the various services.