Question

Problem 11-19 Dropping or Retaining a Segment [LO11-2]

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	$	933,000	$	269,000	$	409,000	$	255,000
Variable expenses		473,000		111,000		203,000		159,000
Contribution margin		460,000		158,000		206,000		96,000
Fixed expenses:
Depreciation		69,500		8,400		40,500		20,600
Liability insurance		43,800		20,600		7,500		15,700
Program administrators’ salaries		114,000		40,200		38,700		35,100
General administrative overhead*		186,600		53,800		81,800		51,000
Total fixed expenses		413,900		123,000		168,500		122,400
Net operating income (loss)	$	46,100	$	35,000	$	37,500	$	(26,400)

*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 $46,100 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