Question

Cumberland County Senior Services is a non-profit organization devoted to providing essential services to seniors who live in their own homes within the Cumberland County area. Three services are provided for seniors—home nursing, Meals on Wheels, and housekeeping. In the home nursing program, nurses visit seniors on a regular basis to check on their general health and to perform tests ordered by their physicians. The Meals on Wheels program delivers a hot meal once a day to each senior enrolled in the program. The housekeeping service provides weekly housecleaning and maintenance services. Data on revenue and expenses for the past year follow:

	Total			Home Nursing			Meals on Wheels			House- keeping
Revenues	$	936,000		$	270,400		$	416,000		$	249,600
Variable expenses		512,800			125,600			220,000			167,200
Contribution margin		423,200			144,800			196,000			82,400
Fixed expenses:
Depreciation		69,520			8,320			40,600			20,600
Liability insurance		43,480			20,600			7,400			15,480
Program administrators’ salaries		117,600			41,000			38,600			38,000
General administrative overhead*		187,200			54,080			83,200			49,920
Total fixed expenses		417,800			124,000			169,800			124,000
Operating income (loss)	$	5,400		$	20,800		$	26,200		$	(41,600	)

*Allocated on the basis of program revenues.

     The head administrator of Cumberland County Senior Services, Judith Ewa, is concerned about the organization’s finances and considers the operating income of $5,400 last year to be razor-thin. (Last year’s results were very similar to the results for previous years and are representative of what would be expected in the future.) She feels that the organization should be building its financial reserves at a more rapid rate in order to prepare for the next inevitable recession. After seeing the above report, Ewa asked for more information about the financial advisability of discontinuing the
housekeeping program.

     The depreciation in the housekeeping category 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. Depreciation charges assume zero salvage value. 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. Compute the change in net operating income for the company as a whole if housekeeping program be discontinued.

1-b. Should the housekeeping program be discontinued?

• Yes

• No

2. Would a segmented income statement format be more useful to management in assessing the long-run financial viability of the various services?

• Yes

• No

Answer 1