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	$	917,000	$	263,000	$	401,000	$	253,000
Variable expenses		471,000		113,000		204,000		154,000
Contribution margin		446,000		150,000		197,000		99,000
Fixed expenses:
Depreciation		70,700		8,900		40,900		20,900
Liability insurance		43,800		20,500		8,000		15,300
Program administrators’ salaries		115,300		40,300		38,800		36,200
General administrative overhead*		183,400		52,600		80,200		50,600
Total fixed expenses		413,200		122,300		167,900		123,000
Net operating income (loss)	$	32,800	$	27,700	$	29,100	$	(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 $32,800 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 or Disadvantage-

Discontinuation of housekeeping program would lead to the following advantage (or disadvantage) to the company-

Particulars	Amount	Amount
Contribution margin lost if the housekeeping program is dropped		($80,000)
Fixed costs that can be avoided:
Liability insurance	$15,000
Program administrator’s salary	37,000	52,000
Decrease in net operating income for the organization as a whole		($28,000)

1.b. Should Housekeeping program be discontinued-

No, the housekeeping should not be discontinued because the program actually generates profits for the company and also based on the computations in the previous part it can be seen that discontinuation will lead to decrease in Net Operating Income of the company.

2.a. Formatted Income Statement-

Particulars	Total	Home Nursing	Meals on Wheels	House-keeping
Revenues	$900,000	$260,000	$400,000	$240,000
Variable expenses	490,000	120,000	210,000	160,000
Contribution margin	410,000	140,000	190,000	80,000
Traceable fixed expenses:
Depreciation	68,000	8,000	40,000	20,000
Liability insurance	42,000	20,000	7,000	15,000
Program administrators’ salaries	115,000	40,000	38,000	37,000
Total traceable fixed expenses	225,000	68,000	85,000	72,000
Program segment margins	185,000	$ 72,000	$105,000	$  8,000
General administrative overhead	180,000
Net operating income (loss)	$  5,000

2.b. Usefulness of segmented income statement-

The administrator of the organisation will get a clearer picture of the financial liability of the organisation. Here, the administrative overhead is not allocated as it is total cost rather than segment specific. Based on the information provided, the Net Operating Income is calculated.