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	$	928,000	$	270,000	$	401,000	$	257,000
Variable expenses		466,000		117,000		193,000		156,000
Contribution margin		462,000		153,000		208,000		101,000
Fixed expenses:
Depreciation		69,400		8,300		40,200		20,900
Liability insurance		43,400		20,600		7,500		15,300
Program administrators’ salaries		116,100		40,800		38,600		36,700
General administrative overhead*		185,600		54,000		80,200		51,400
Total fixed expenses		414,500		123,700		166,500		124,300
Net operating income (loss)	$	47,500	$	29,300	$	41,500	$	(23,300)

*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 $47,500 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):-

Jackson Company
Incremental Analysis of Dropping Housekeeping program
Particulars	Amount ($)	Amount ($)
Expected decrease in Revenue		257,000
Expected decrease in variable expense	156,000
Expected decrease in Fixed expenses(which we can avoid)
Liability insurance	15,300
Salaries of program administrators	36,700
Expected decrease in total expenses		208,000
Expected decrease in net operating income		49,000
The financial disadvantage is company net operating income will decrease by $49,000. Answer 1(b):- The company should not discontinuing the housekeeping program because if it is dropped, the operating income will decrease by $49,000 and the total revenue will also decrease by $257,000 Answer 2(a):- Jackson Company Income Statement Particulars Home Nurshing Meal on wheels House Keeping Total Revenue                  270,000                    401,000                 257,000          928,000 Variable cost                  117,000                    193,000                 156,000          466,000 Contribution margin(Revenue - Variable cost)                  153,000                    208,000                 101,000          462,000 Traceble Fixed expenses:- Depreciation                      8,300                      40,200                   20,900            69,400 Liability Insurance                    20,600                        7,500                   15,300            43,400 Program administrator salary                    40,800                      38,600                   36,700          116,100 Total traceble fixed expense                    69,700                      86,300                   72,900          228,900 Program segment margin (contribution - fixed expense)                    83,300                    121,700                   28,100          233,100 General administrative overhead          185,600 Net operating income (loss)            47,500 Answer 2(b):- Yes, the segmented income statement format would be more useful to management in assessing the long-run financial viability of the various services.