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	$	924,000	$	266,000	$	402,000	$	256,000
Variable expenses		482,000		120,000		207,000		155,000
Contribution margin		442,000		146,000		195,000		101,000
Fixed expenses:
Depreciation		70,000		8,400		40,700		20,900
Liability insurance		43,800		20,600		7,800		15,400
Program administrators’ salaries		114,500		40,100		39,000		35,400
General administrative overhead*		184,800		53,200		80,400		51,200
Total fixed expenses		413,100		122,300		167,900		122,900
Net operating income (loss)	$	28,900	$	23,700	$	27,100	$	(21,900)

*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 $28,900 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
	Current Total	Total If House-keeping Is Dropped	Difference: Net Operating Income Increase or (Decrease)		The financial (disadvantage) of discontinuing the Housekeeping program is calculated as follows
Revenues	924,000	668,000	-256,000		Contribution margin lost if the Housekeeping program is dropped		-101,000
Variable expenses	482,000	327,000	-155,000	or	Fixed costs that can be avoided:
Contribution margin	442,000	341,000	-101,000		Liability insurance	15,400
Fixed expenses:					Program administrator’s salary	35,400	50,800
Depreciation*	70,000	70,000	0		Financial (disadvantage) of discontinuing the Housekeeping program		-50,200
Liability insurance	43,800	28,400	15,400
Program administrators’ salaries	114,500	79,100	35,400
General administrative overhead	184,800	184,800	0
Total fixed expenses	413,100	362,300	50,800
Net operating income (loss)	28,900	-21,300	-50,200
1-b
No,  the Housekeeping program should not be discontinued .
2(a)
	Total	Home Nursing	Meals On Wheels	House- keeping
Revenues	924,000	266,000	402,000	256,000
Variable expenses	482,000	120,000	207,000	155,000
Contribution margin	442,000	146,000	195,000	101,000
Traceble Fixed expenses:
Depreciation	70,000	8,400	40,700	20,900
Liability insurance	43,800	20,600	7,800	15,400
Program administrators’ salaries	114,500	40,100	39,000	35,400
Total Traceble Fixed expenses:	228,300	69,100	87,500	71,700
Product Segment Margin	213,700	76,900	107,500	29,300
General administrative overhead	184,800
Net Operating Income (loss)	28,900
2(b)
Yes, a segmented income statement format would be more useful to management in assessing the long-run financial viability of the various services. To give the administrator of the entire organization a clearer picture of the financial viability of each of the organization’s programs, the general administrative overhead should not be allocated. It is a common cost that should be deducted from the total program segment margin.