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	$	923,000	$	261,000	$	405,000	$	257,000
Variable expenses		472,000		111,000		208,000		153,000
Contribution margin		451,000		150,000		197,000		104,000
Fixed expenses:
Depreciation		69,100		8,200		40,700		20,200
Liability insurance		43,600		20,200		7,900		15,500
Program administrators’ salaries		114,600		40,500		38,700		35,400
General administrative overhead*		184,600		52,200		81,000		51,400
Total fixed expenses		411,900		121,100		168,300		122,500
Net operating income (loss)	$	39,100	$	28,900	$	28,700	$	(18,500)

*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 $39,100 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

• Required 1-a

  Contribution margin lost if the housekeeping program is dropped................................................................(104,000)

  Fixed costs that can be avoided:

  Liability insurance......................................................15,500

  Program administrators salary..................................35,400

  Total avoidable fixed costs..................…................. 50900

  Decrease in net operating income for the organization as a whole...... (53,100)

• the financial advantage (disadvantage) of discontinuing the Housekeeping program is $(53,100)

  Required 1-b

  No, the housekeeping program should not be discontinued. It is actually generating a positive program segment margin and is, of course, providing a valuable service to seniors.

  Required 2-a

  	Total	home nursing	meals on wheels	house keeping
  Revenues	923000	261000	405000	257000
  Variable expenses	472000	111000	208000	153000
  Contribution margin	451000	150000	197000	104000
  Traceable fixed expenses :
  Depreciation	61900	8200	40700	20200
  Liability insurance	43600	20200	7900	15500
  Program administrators' salaries	114600	40500	38700	35400
  Total Traceable fixed expenses	227300	68900	87300	71100
  Program segment margins	223700	81100	109700	32900
  General administrative overhead	184600
  Net operating income (loss)	39100

  Required 2 - b

  Yes, to give the administrator of the entire organization a clearer picture of the financial viability of each of the organization’s programs, the general administrative overhead should not be allocated. It is a common cost that should be deducted from the total program segment margin.