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	$	928,000	$	267,000	$	407,000	$	254,000
Variable expenses		463,000		116,000		195,000		152,000
Contribution margin		465,000		151,000		212,000		102,000
Fixed expenses:
Depreciation		69,900		8,400		40,900		20,600
Liability insurance		44,000		20,700		7,700		15,600
Program administrators’ salaries		115,800		40,800		38,800		36,200
General administrative overhead*		185,600		53,400		81,400		50,800
Total fixed expenses		415,300		123,300		168,800		123,200
Net operating income (loss)	$	49,700	$	27,700	$	43,200	$	(21,200)

*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 $49,700 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

Incremental Analysis
				TOTAL	Discontinue	Net Increase/(Decrease)
				AMOUNT $	AMOUNT $	AMOUNT $
Sales Revenue			9,28,000	6,74,000	-2,54,000
Less: Variable cost			4,63,000	3,11,000	1,52,000
Contribution margin			4,65,000	3,63,000	-1,02,000
Less: Fixed cost
Depreciation			69,900	69,900	0
Liability insurance			44,000	28,400	15,600
Program admin salaries		1,15,800	79,600	36,200
general admin expense		1,85,600	1,85,600	0
SEGMENT MARGIN			49,700	-500	-50,200
No, House Keeping Division Shall not be Discontinued
SEGMENT-WISE INCOME STATEMENT
				TOTAL	Home Nurs	Meals on Wheels	House Keeping
				AMOUNT $	AMOUNT $	AMOUNT $	AMOUNT $
Sales Revenue			9,28,000	2,67,000	4,07,000	2,54,000
Less: Variable cost			4,63,000	1,16,000	1,95,000	1,52,000
Contribution margin			4,65,000	1,51,000	2,12,000	1,02,000
Less: Traceable Expense
Depreciation			69,900	8,400	40,900	20,600
Liability Insurance			44,000	20,700	7,700	15,600
Program admin salaries		1,15,800	40,800	38,800	36,200
Total Traecable expense		2,29,700	69,900	87,400	72,400
SEGMENT MARGIN			2,35,300	81,100	1,24,600	29,600
Less: General admin overheads		1,85,600
Net Operating Income		49,700
Yes, It provides more meaningful presentation for management to assess the performance