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	$	1,026,000		$	296,400		$	456,000		$	273,600
Variable expenses		569,800			139,600			245,000			185,200
Contribution margin		456,200			156,800			211,000			88,400
Fixed expenses:
Depreciation		73,320			9,120			42,100			22,100
Liability insurance		47,180			22,100			8,400			16,680
Program administrators’ salaries		124,100			43,500			40,100			40,500
General administrative overhead*		205,200			59,280			91,200			54,720
Total fixed expenses		449,800			134,000			181,800			134,000
Operating income (loss)	$	6,400		$	22,800		$	29,200		$	(45,600	)

*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 $6,400 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

HELP NEEDED URGENT

Answer 1

1a
	Current Total	Total If house keeping is Dropped	Difference: Net Operating Income
Sales	1026000	752400	-273600
Variable expenses	569800	384600	185200
Contribution margin	456200	367800	-88400
Fixed expenses:
Depreciation	73320	73320	0
Liability insurance	47180	30500	16680
Program administrators’ salaries	124100	83600	40500
General administrative overhead	205200	205200	0
Total fixed expenses	449800	392620	57180
Net operating income (loss)	6400	-24820	-31220
Decrease in net operating income $31220
1b
No, the housekeeping program should not be discontinued
2a
	Total	Home nursing	Meals on Wheels	House Keeping
Sales	1026000	296400	456000	273600
Variable expenses	569800	139600	245000	185200
Contribution margin	456200	156800	211000	88400
Traceable fixed expenses:
Depreciation	73320	9120	42100	22100
Liability insurance	47180	22100	8400	16680
Program administrators’ salaries	124100	43500	40100	40500
Total traceable fixed expenses	244600	74720	90600	79280
Program segment margins	211600	82080	120400	9120
General administrative overhead	205200
Net operating income (loss)	6400
2b
Yes, a segmented income statement would be more useful