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	$	930,000	$	270,000	$	403,000	$	257,000
Variable expenses		469,000		115,000		196,000		158,000
Contribution margin		461,000		155,000		207,000		99,000
Fixed expenses:
Depreciation		69,800		8,800		40,600		20,400
Liability insurance		43,900		20,100		7,900		15,900
Program administrators’ salaries		113,700		40,100		38,300		35,300
General administrative overhead*		186,000		54,000		80,600		51,400
Total fixed expenses		413,400		123,000		167,400		123,000
Net operating income (loss)	$	47,600	$	32,000	$	39,600	$	(24,000)

*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 $47,600 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 1-a:

Computation of financial advantage (disadvantage) of discontinuing Housekeeping
Particulars	Continue Housekeeping	Discontinue Housekeeping	Financial Advantage (Disadvantage) of discontinuing Housekeeping
Revenue	$257,000.00	$0.00	-$257,000.00
Costs:
Varaible Expenses	$158,000.00	$0.00	-$158,000.00
Fixed Expenses:
Depreciation (Sunk Cost)	$0.00	$0.00	$0.00
liability insurance	$15,900.00	$0.00	-$15,900.00
Program administrators' salaries	$35,300.00	$0.00	-$35,300.00
General Administrative Overhead	$51,400.00	$51,400.00	$0.00
Total Expenses	$260,600.00	$51,400.00	-$209,200.00
Income / (Loss)	-$3,600.00	-$51,400.00	-$47,800.00

Solution 1-b:

No, the House-keeping program should not be discontinued because if it is discontinued there will be financial disadvantage of $47,800.

Solution 2-a:

Segmented income statement
Particulars	Total	Home Nursing	Meals on wheels	House-keeping
Sales Revenue	$930,000.00	$270,000.00	$403,000.00	$257,000.00
Variable expenses	$469,000.00	$115,000.00	$196,000.00	$158,000.00
Contribution margin	$461,000.00	$155,000.00	$207,000.00	$99,000.00
Traceable Fixed Expenses:
Depreciation	$69,800.00	$8,800.00	$40,600.00	$20,400.00
Liability Insurance	$43,900.00	$20,100.00	$7,900.00	$15,900.00
Program Administrators' Salaries	$113,700.00	$40,100.00	$38,300.00	$35,300.00
Segement Margin	$233,600.00	$86,000.00	$120,200.00	$27,400.00
Common fixed cost	$186,000.00
Net operating Income	$47,600.00

Solution 2-b:

Yes, a segmented income statement format be more useful to management in assessing the long-run financial viability of the various services as this considers traceable fixed costs in computing segments profitability.