Question

ackson 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	$	927,000	$	265,000	$	409,000	$	253,000
Variable expenses		457,000		112,000		192,000		153,000
Contribution margin		470,000		153,000		217,000		100,000
Fixed expenses:
Depreciation		69,300		8,900		40,100		20,300
Liability insurance		43,600		20,900		7,300		15,400
Program administrators’ salaries		115,500		40,800		38,700		36,000
General administrative overhead*		185,400		53,000		81,800		50,600
Total fixed expenses		413,800		123,600		167,900		122,300
Net operating income (loss)	$	56,200	$	29,400	$	49,100	$	(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 $56,200 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?

2-a. Prepare a properly formatted segmented income statement.

2-b. Would a segmented income statement format be more useful to management in assessing the long-run financial viability of the various services?

Answer 1

Answer:

1-a. What is the financial advantage (disadvantage) of discontinuing the Housekeeping program?

	Total	Total if House keeping Program dropped	Difference net operating income increase or (decrease)
Revenues	927000	674000	-253000
Variable expenses	457000	304000	153000
Contribution margin	470000	370000	-100000
Fixed expenses:
Depreciation	69300	69300	0
Liability insurance	43600	28200	15400
Program administrators’ salaries	115500	79500	36000
General administrative overhead*	185400	185400	0
Total fixed expenses	413800	362400	51400
Net operating income (loss)	56200	7600	-48600

___________________________________________

1-b. Should the Housekeeping program be discontinued?

Answer: NO

Housekeeping program should not be discontinued

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2-a. Prepare a properly formatted segmented income statement.

	Total	Home Nursing	Meals On Wheels	House-
				keeping
Revenues	927000	265000	409000	253000
Variable expenses	457000	112000	192000	153000
Contribution margin	470000	153000	217000	100000
Traceable Fixed expenses:
Depreciation	69300	8900	40100	20300
Liability insurance	43600	20900	7300	15400
Program administrators’ salaries	115500	40800	38700	36000
Total Traceable Fixed expenses:	228400	70600	86100	71700
Program segment margin	241600	82400	130900	28300
General administrative overhead*	185400
Net operating income (loss)	56200

2-b. Would a segmented income statement format be more useful to management in assessing the long-run financial viability of the various services?

Answer: Yes