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	$	919,000	$	264,000	$	403,000	$	252,000
Variable expenses		477,000		117,000		209,000		151,000
Contribution margin		442,000		147,000		194,000		101,000
Fixed expenses:
Depreciation		69,400		8,600		40,600		20,200
Liability insurance		44,200		21,000		7,600		15,600
Program administrators’ salaries		115,900		40,300		38,600		37,000
General administrative overhead*		183,800		52,800		80,600		50,400
Total fixed expenses		413,300		122,700		167,400		123,200
Net operating income (loss)	$	28,700	$	24,300	$	26,600	$	(22,200)
*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 $28,700 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. 1A) What is the financial advantage (disadvantage) of discontinuing the Housekeeping program? 1B) Should the Housekeeping program be discontinued? 2) Prepare a properly formatted segmented income statement. Total Home Nursing Meals On Wheels House-keeping Revenues Variable expenses Contribution margin 0 0 0 0 Traceable fixed expenses: Depreciation Liability insurance Program administrators’ salaries Total traceable fixed expenses 0 0 0 0 Program segment margins 0 $0 $0 $0 General administrative overhead Net operating income (loss) 0 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
	Current Total	Total If house keeing is Dropped	Difference: Net Operating Income
Sales	919000	667000	-252000
Variable expenses	477000	326000	151000
Contribution margin	442000	341000	-101000
Fixed expenses:
Depreciation	69400	69400	0
Liability insurance	44200	28600	15600
Program administrators’ salaries	115900	78900	37000
General administrative overhead	183800	183800	0
Total fixed expenses	413300	360700	52600
Net operating income (loss)	28700	-19700	-48400
Financial (disadvantage) $(48400)
b
No, the housekeeping program should not be discontinued
2a
	Total	Home nursing	Meals on Wheels	House Keeping
Sales	919000	264000	403000	252000
Variable expenses	477000	117000	209000	151000
Contribution margin	442000	147000	194000	101000
Traceable fixed expenses:
Depreciation	69400	8600	40600	20200
Liability insurance	44200	21000	7600	15600
Program administrators’ salaries	115900	40300	38600	37000
Total traceable fixed expenses	229500	69900	86800	72800
Program segment margins	212500	77100	107200	28200
General administrative overhead	183800
Net operating income (loss)	28700
2b
Yes, a segmented income statement format be more useful to management