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	$	926,000	$	264,000	$	407,000	$	255,000
Variable expenses		469,000		117,000		201,000		151,000
Contribution margin		457,000		147,000		206,000		104,000
Fixed expenses:
Depreciation		68,900		8,200		40,400		20,300
Liability insurance		43,700		20,500		7,200		16,000
Program administrators’ salaries		116,200		41,000		38,400		36,800
General administrative overhead*		185,200		52,800		81,400		51,000
Total fixed expenses		414,000		122,500		167,400		124,100
Net operating income (loss)	$	43,000	$	24,500	$	38,600	$	(20,100)

*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 $43,000 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

Ans:

1a.Incremental Analysis of Dropping HouseKeeping Program
Details	Amount	Amount
Expected Decrease in Revenue		$ 255,000.00
Expected Decrease in Variable Expenses	$ 151,000.00
Expected Decrease in Fixed Expenses(fixed cost that can Avoided)
Liability Insurance	$ 16,000.00
Salaries of Program Administrators	$ 36,800.00
Expected Decrease in Total Expenses		$ 203,800.00
Expected decrease in Net Operating Income		$ 51,200.00
The net operating income of the company is decreased by   51200   by discounting the housekeeping program.
1b.
The company should not discontinuing the housekeeping program because if it is dropped, the operating income will decrease by    51200
and the total revenue will also decrease by    255000
2a.
	Total	Home Nursing	Meals on Wheels	Housekeeping
Sales	$ 926,000.00	$ 264,000.00	$ 407,000.00	$ 255,000.00
Variable Manufacturing And Selling Expenses	$ 469,000.00	$ 117,000.00	$ 201,000.00	$ 151,000.00
Contribution Margin (Loss) (a)	$ 457,000.00	$ 147,000.00	$ 206,000.00	$ 104,000.00
Traceable Fixed Expenses:
Depreciation	$ 68,900.00	$ 8,200.00	$ 40,400.00	$ 20,300.00
Liability Insurance	$ 43,700.00	$ 20,500.00	$ 7,200.00	$ 16,000.00
Program Admin Salaries	$ 116,200.00	$ 41,000.00	$ 38,400.00	$ 36,800.00
Total Traceable Fixed Expenses (b)	$ 228,800.00	$ 69,700.00	$ 86,000.00	$ 73,100.00
Product Line Segment Margin (a-)	$ 228,200.00	$ 77,300.00	$ 120,000.00	$ 30,900.00
General Administrative Overhead	$ 185,200.00
Net Operating Income (Loss)	$ 43,000.00
2b. Yes , Segmental income is more Useful to Management