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 Meals On House- Total Nursing Wheels keeping $920,000 $ 262,000 $403,000 $ 255,000 467,000 113,000 195,000 159,000 453,000 149,000 208,000 96,000 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 8,900 40,700 20,100 44,400 20,700 7,800 15,900 114,600 40,500 38,300 35,800 184,000 52,400 80,600 51,000 412,700 122,500 167,400 122,800 $ 40,300 $ 26,500 $ 40,600 $(26,800) *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 $40,300 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

1-a.

Total Total if Difference net House keepi operating Program dro income increa (decrease) Revenues $ 9,20,000.00 $6,65,000.00 $-2,55,000.00 Variable expenses $4,67,000.00 $3,08,000.00 $ 1,59,000.00 Contribution margin $4,53,000.00 $3,57,000.00 $ 96,000.00 Fixed expenses: Depreciation $ 69,700.00 $ 69,700.00 $ Liability insurance $ 44,400.00 $ 28,500.00 $ 15,900.00 Program administrators' sa $ 1,14,600.00 $ 78,800.00 $ 35,800.00 General administrative over $1,84,000.00 $1,84,000.00 $ Total fixed expenses $4,12,700.00 $3,61,000.00 $ 51,700.00 Net operating income (10 $ 40,300.00 $ 4,000.00 $ -44,300.00

1-b. Should the Housekeeping program be discontinued? Answer: NO

2-a

Segmented Income Statement Total Home Nursing Meals On Whe House- keeping Revenues $ 9,20,000.00 $ 2,62,000.00 $ 4,03,000.00 $ 2,55,000.00 Variable expenses $4,67,000.00 $1,13,000.00 $ 1,95,000.00 $ 1,59,000.00 Contribution margin $4,53,000.00 $1,49,000.00 $ 2,08,000.00 $ 96,000.00 Traceable Fixed expenses: Depreciation $ 69,700.00 $ 8,900.00 $ 40,700.00 $ 20,100.00 Liability insurance $ 44,400.00 $ 20,700.00 $ 7,800.00 $ 15,900.00 Program administrators' salaries $1,14,600.00 $ 40,500.00 $ 38,300.00 $ 35,800.00 Total Traceable Fixed expenses: $2,28,700.00 $ 70,100.00 $ 86,800.00 $ 71,800.00 Program segment margin $ 2,24,300.00 $ 78,900.00 $ 1,21,200.00 $ 24,200.00 General administrative overhead* $ 1,84,000.00 Net operating income (loss) $ 40,300.00

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