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	$	921,000	$	263,000	$	400,000	$	258,000
Variable expenses		464,000		115,000		195,000		154,000
Contribution margin		457,000		148,000		205,000		104,000
Fixed expenses:
Depreciation		69,600		8,200		40,900		20,500
Liability insurance		44,100		20,900		7,700		15,500
Program administrators’ salaries		115,500		41,000		38,600		35,900
General administrative overhead*		184,200		52,600		80,000		51,600
Total fixed expenses		413,400		122,700		167,200		123,500
Net operating income (loss)	$	43,600	$	25,300	$	37,800	$	(19,500)

*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 $43,600 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. What is the financial advantage (disadvantage) of discontinuing the Housekeeping program?

Answer:

Financial disadvantage

-52,600

Calculation

To calculate the financial advantage / disadvantage we need to take the contribution margin of the segment which is planning to be discontinued. So if we discontinue its contribution margin will be lost, so include it as negative.

Depreciation is a sunk cost here, also the van is donated so it has zero salvage value. General administrative overhead is allocated and so not relevant to the decision.

Then, we need to consider the fixed costs that can be avoided which are liability insurance and program administrator salaries. Adding these two amounts with the contribution margin will give the financial advantage / disadvantage. It is calculated as below:

Contribution margin lost if the Housekeeping program is dropped		-104,000
Fixed costs that can be avoided:
Liability insurance	15,500
Program administrator’s salary	35,900	51,400
Financial (disadvantage) of discontinuing the Housekeeping program		-52,600

1-b. Should the Housekeeping program be discontinued?

Answer:

No

Explanation:

The Housekeeping program segment should not be discontinued. Because there is financial disadvantage of $52,600 when the firm is discontiuing the house keeping program.  So it is better to keep the house keeping program.

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

Answer:

	Total	Home Nursing	Meals on Wheels	House-keeping
Revenues	921,000	263,000	400,000	258,000
Variable expenses	464,000	115,000	195,000	154,000
Contribution margin	457,000	148,000	205,000	104,000
Traceable fixed Expenses:
Depreciation	69,600	8,200	40,900	20,500
Liabilty insureance	44,100	20,900	7,700	15,500
Program administrators salaries	115,500	41,000	38,600	35,900
Total traceable fixed expenses	229,200	70,100	87,200	71,900
Program segment margins	227,800	77,900	117,800	32,100
General administrative overhead	184,200
Net operating income (loss)	43,600

Calculation

To prepare the segmented income statement, as usual we need to take the revenue from all segments and also show a total column for total. Then deduct variable expenses, to get the contribution margin. The deduct all the traceable fixed expenses. From that we get the program segment margin. The general and administrative expenses arent allocated as it is a common cost that should be deducted from the total program segment margin to get the net operating income.

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:

Yes

Explanation

Yes, it would help the management in assessing the long-run financial viability of the various services. Because it the segmented income statement, we donot allocate the general administrative overhead . So it will give a clearer picture of the financial viability of each of the organization’s programs.