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 $ 922,000 $ 269,000 $ 402,000 $ 251,000 Variable expenses 471,000 116,000 203,000 152,000 Contribution margin 451,000 153,000 199,000 99,000 Fixed expenses: Depreciation 69,400 8,500 40,400 20,500 Liability insurance 42,700 20,200 7,200 15,300 Program administrators’ salaries 114,500 40,600 38,100 35,800 General administrative overhead* 184,400 53,800 80,400 50,200 Total fixed expenses 411,000 123,100 166,100 121,800 Net operating income (loss) $ 40,000 $ 29,900 $ 32,900 $ (22,800) *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 $40,000 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

Solution:

a.) Statement showing Impact on Net Operating Income(if house keeping discontinued)

Particulars	Current Total	Total if housekeeping is dropped	Net Increase/Decrease
Revenues	$922,000	$671,000	-$251,000
Variable Expenses	$471,000	$319,000	-$152,000
Contribution Margin	$451,000	$252,000	-$199,000
Fixed Expenses:
Depreciation	$69,400	$48,900	-$20,500
Liability Insurance	$42,700	$27,400	-$15,300
Program administrator Salary	$114,500	$78,700	-$35,800
General Administrative Overhead	$184,400	$184,400	No Change
Total Fixed Expenses	$411,000	$339,400	-$71,600
Net Operating Income	$40,000	$87,400	-$127,400

-b) No, House keeping should not be discontinued because there will be a decrease in Net Operation income by $127,400

2a)

Segmented Income Statement (Amt in $)

Particulars	Home Nursing	Meals On wheels	House Keeping	Total
Revenues	269,000	402,00	251,000	922,000
Variable Expenses	116,000	203,000	152,000	471,000
Contribution Margin (a)	153,000	199,000	99,000	451,000
Traceable Fixed Expenses:
Depreciation	8,500	40,400	20,500	69,400
Liability Insurance	20,200	7,200	15,300	42,700
Program adnimistrators salaries	40,600	38,100	35,800	114,500
Total fixed Traceable expenses (b)	69,500	86,900	71,100	227,500
Program Segment Margin(a-b)	83,500	112,100	27,900	223,500
General administrative Overhead				184,400
Net Operation Income				$40,000

2b)

Yes, segmented income statement format is useful to management for assessing the long run financial viability of various services because above statement has shown that house keeping margin helped in recovering General administrative overhead by $27,900. If company has discontinued house keeping segment, company net operating income would be lower by $27,900.