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.       Homenursin
Revenues.                     934000        269000
variable expenses.       479000.      117000
contribution margin.    455000.       152000
fixed expenses
depreciation.                   69800.       8700
liability insurance.           43900.       20600
program administrators salaries 115500/40100
general administrative overhead 186800/53800
total fixed expenses.                      416000/123200
net operating income loss.              39000/28800
Meals on Wheels: Revenues 409000, Variable expenses 205000, contribution margin 204000, depreciation 40900, liability insurance 7600, program administrators salaries 38800, general administrative overhead 81800, total fixed expenses 169100, net operating incomes 34900.
House keeping: Revenues 256000, variable expenses 157000, contribution margin 99000, depreciation 20200, liability insurance 15700 program administrators salaries 36600, general administrative overhead 51200, total fixed expenses 123700 , net operating income loss ( 24700).
The head administrator of Jackson County Senior Services, Judith Miyama considers last year s net operating income of 39000 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.
1. What is the financial advantage, disadvantage of discontinuing the Housekeeping program?
2. Prepare a properly formatted segmented income statement.

Answer 1

1.Income statement
	(1)Current Total	(2)Housekeeping total	Total If house keeping is Dropped (1-2)
Sales	934,000	256000	678,000
Variable expenses	479000	157000	322,000
Contribution margin	455000	99000,	356,000
Fixed expenses:
Depreciation	69800	0	69800
Liability insurance	43,900	15,700	28,200
Program administrators’ salaries	115500	36600	78,900
General administrative overhead	186800	0	186800
Total fixed expenses	416,000	52,300	363,700
Net operating income (loss)	39,000	46,700	(7,700)

Financial (disadvantage) = $(46,700)

2.   Income statement

	Total	Home nursing	House Keeping	Meals on Wheels
Sales	914000	269000	256000	409,000
Variable expenses	464000	117000	157000	205,000
Contribution margin	450000	152000	99000	204,000
Traceable fixed expenses:
Depreciation	69800	8700	20200	40900
Liability insurance	43900	20600	15700	7600
Program administrators’ salaries	115500	40100	36600	38,800
Total traceable fixed expenses	(229,200)	(69,400)	(72,500)	(87,300)
Program segment margins	220,800	82,600	26,500	116,700
General administrative overhead	(186800 )
Net operating income (loss)	34000

A properly formatted segmented income statement shows the actual profit or loss . General administrative overheads will be same even if any of the service is discontinued that is the reason they are to be subtracted from total margin and not the segmented margins.