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	$	269,000	$	404,000	$	253,000
Variable expenses		470,000		114,000		197,000		159,000
Contribution margin		456,000		155,000		207,000		94,000
Fixed expenses:
Depreciation		69,500		8,500		40,800		20,200
Liability insurance		43,500		20,300		7,300		15,900
Program administrators’ salaries		113,800		40,700		38,100		35,000
General administrative overhead*		185,200		53,800		80,800		50,600
Total fixed expenses		412,000		123,300		167,000		121,700
Net operating income (loss)	$	44,000	$	31,700	$	40,000	$	(27,700)

*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 $44,000 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

1
	Current Total	Total If house keeing is Dropped	Difference: Net Operating Income
Sales	926000	673000	-253000
Variable expenses	470000	311000	159000
Contribution margin	456000	362000	-94000
Fixed expenses:
Depreciation	69500	69500	0
Liability insurance	43500	27600	15900
Program administrators’ salaries	113800	78800	35000
General administrative overhead	185200	185200	0
Total fixed expenses	412000	361100	50900
Net operating income (loss)	44000	900	-43100
Financial (disadvantage) $(43100)
b
No, the housekeeping program should not be discontinued
2a
	Total	Home nursing	Meals on Wheels	House Keeping
Sales	926000	269000	404000	253000
Variable expenses	470000	114000	197000	159000
Contribution margin	456000	155000	207000	94000
Traceable fixed expenses:
Depreciation	69500	8500	40800	20200
Liability insurance	43500	20300	7300	15900
Program administrators’ salaries	113800	40700	38100	35000
Total traceable fixed expenses	226800	69500	86200	71100
Program segment margins	229200	85500	120800	22900
General administrative overhead	185200
Net operating income (loss)	44000
2b
Yes, a segmented income statement format would be more useful to management