Question

Problem 12-19 Dropping or Retaining a Segment [LO12-2] 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 $ 935,000 $ 269,000 $ 409,000 $ 257,000 Variable expenses 469,000 116,000 199,000 154,000 Contribution margin 466,000 153,000 210,000 103,000 Fixed expenses: Depreciation 69,200 8,500 40,500 20,200 Liability insurance 44,100 20,900 7,600 15,600 Program administrators’ salaries 116,000 40,500 38,900 36,600 General administrative overhead* 187,000 53,800 81,800 51,400 Total fixed expenses 416,300 123,700 168,800 123,800 Net operating income (loss) $ 49,700 $ 29,300 $ 41,200 $ (20,800) *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 $49,700 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

				Current	house	income
				total	keeping	increase or
					Dropped	(decrease)
	Revenues			935,000	678000	-257,000
	Variable expenses			469,000	315000	154,000
	Conribution margin			466,000	363000	-103,000
	Fixed expenses:
	Depreciation			69,200	69,200	0
	liability insurance			44,100	28500	15,600
	program administrator's salaries			116,000	79400	36,600
	General administrative overhead			187,000	187,000	0
	total fixed expense			416,300	364,100	52,200
	Net operating income(loss)			49,700	-1,100	-50,800
	financial disavantage =			-50,800
1-b)	No
2-a)			Segmented income statement
				total	home	meals on	House
					nursing	wheels	keeping
	Revenues			935,000	269,000	409,000	257,000
	Variable expenses			469,000	116,000	199,000	154,000
	Conribution margin			466,000	153,000	210,000	103,000
	Traceable fixed expense
	Depreciation			69,200	8,500	40,500	20,200
	liability insurance			44,100	20,900	7,600	15,600
	program administrators salaries			116,000	40,500	38,900	36,600
	total traceable fixed expense			229,300	69,900	87,000	72,400
	program segement margin			236,700	83,100	123,000	30,600
	General administrative overhead			187,000
	net operating income (loss)			49,700
2-b)	yes