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	$	268,000	$	408,000	$	252,000
Variable expenses		480,000		119,000		207,000		154,000
Contribution margin		448,000		149,000		201,000		98,000
Fixed expenses:
Depreciation		70,600		9,000		40,900		20,700
Liability insurance		43,200		20,100		7,800		15,300
Program administrators’ salaries		114,200		40,900		38,200		35,100
General administrative overhead*		185,600		53,600		81,600		50,400
Total fixed expenses		413,600		123,600		168,500		121,500
Net operating income (loss)	$	34,400	$	25,400	$	32,500	$	(23,500)

*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 $34,400 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................................................................(98,000)

Fixed costs that can be avoided:

Liability insurance......................................................15,300

Program administrators salary..................................35,100

Total avoidable fixed costs..................…................. 50400

Decrease in net operating income for the organization as a whole...... (47600)

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	928000	268000	408000	252000
Variable expenses	480000	119000	207000	154000
Contribution margin	448000	149000	201000	98000
Traceable fixed expenses :
Depreciation	70600	9000	40900	20700
Liability insurance	43200	20100	7800	15300
Program administrators' salaries	114200	40900	38200	35100
Total Traceable fixed expenses	228000	70000	86900	71100
Program segment margins	220000	79000	114100	26900
General administrative overhead	185600
Net operating income (loss)	34400

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.