Question

Problem 11-19 Dropping or Retaining a Segment [LO11-2]

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	$	925,000	$	262,000	$	406,000	$	257,000
Variable expenses		472,000		113,000		203,000		156,000
Contribution margin		453,000		149,000		203,000		101,000
Fixed expenses:
Depreciation		70,400		8,700		40,700		21,000
Liability insurance		43,200		20,100		7,700		15,400
Program administrators’ salaries		115,300		40,200		38,700		36,400
General administrative overhead*		185,000		52,400		81,200		51,400
Total fixed expenses		413,900		121,400		168,300		124,200
Net operating income (loss)	$	39,100	$	27,600	$	34,700	$	(23,200)

*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 $39,100 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

1-a.Financial advantage (disadvantage) of discontinuing the Housekeeping program
Loss of segment contribution	-101000
Expenses that can be avoided:
Liability insurance	15,400
Program administrators’ salaries	36,400
Financial disadvantage	-49,200
(Allocated gen adm.OH & notional expense of depreciation are not considered).For depn. The tax saved will be lost ,if the segment is dicontinued.
1.b. NO.

Segmented Income statement	Total	Home Nursing	Meals On Wheels	House- keeping
Revenues	925,000	262,000	406,000	257,000
Variable expenses	472,000	113,000	203,000	156,000
Contribution margin	453,000	149,000	203,000	101,000
Fixed expenses:
Depreciation	70,400	8,700	40,700	21,000
Liability insurance	43,200	20,100	7,700	15,400
Program administrators’ salaries	115,300	40,200	38,700	36,400
Segment Income	224,100	80,000	115,900	28,200
General administrative overhead	185,000
Net operating income (loss)	39,100
2.b. YES.
It can help the management to distinguish between oHs that are specific to the segment and that are allocated . The segment or its managers have no control over allocated costs .