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	$	922,000	$	264,000	$	405,000	$	253,000
Variable expenses		465,000		114,000		200,000		151,000
Contribution margin		457,000		150,000		205,000		102,000
Fixed expenses:
Depreciation		69,700		8,500		40,900		20,300
Liability insurance		43,400		20,400		7,900		15,100
Program administrators’ salaries		115,700		40,800		38,100		36,800
General administrative overhead*		184,400		52,800		81,000		50,600
Total fixed expenses		413,200		122,500		167,900		122,800
Net operating income (loss)	$	43,800	$	27,500	$	37,100	$	(20,800)

*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 $43,800 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? yes or no?

2-a. Prepare a properly formatted segmented income statement.

	Total Home Nursing Meals On Wheels House-keeping Revenues Variable expenses Contribution margin Traceable fixed expenses: Depreciation Liability insurance Program administrators’ salaries Total traceable fixed expenses Program segment margins General administrative overhead Net operating income (loss)

2-b. Would a segmented income statement format be more useful to management in assessing the long-run financial viability of the various services? yes or no?

Answer 1

1a
	Current Total	Total If house keeping is Dropped	Difference: Net Operating Income
Sales	922000	669000	-253000
Variable expenses	465000	314000	151000
Contribution margin	457000	355000	-102000
Fixed expenses:
Depreciation	69700	69700	0
Liability insurance	43400	28300	15100
Program administrators’ salaries	115700	78900	36800
General administrative overhead	184400	184400	0
Total fixed expenses	413200	361300	51900
Net operating income (loss)	43800	-6300	-50100
Financial (disadvantage) $(50100)
1b
No, the housekeeping program should not be discontinued
2a
	Total	Home nursing	Meals on Wheels	House Keeping
Sales	922000	264000	405000	253000
Variable expenses	465000	114000	200000	151000
Contribution margin	457000	150000	205000	102000
Traceable fixed expenses:
Depreciation	69700	8500	40900	20300
Liability insurance	43400	20400	7900	15100
Program administrators’ salaries	115700	40800	38100	36800
Total traceable fixed expenses	228800	69700	86900	72200
Program segment margins	228200	80300	118100	29800
General administrative overhead	184400
Net operating income (loss)	43800
2b
Yes, a segmented income statement would be more useful