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	$	262,000	$	408,000	$	253,000
Variable expenses		467,000		111,000		200,000		156,000
Contribution margin		456,000		151,000		208,000		97,000
Fixed expenses:
Depreciation		70,100		8,700		40,700		20,700
Liability insurance		43,900		20,500		7,700		15,700
Program administrators’ salaries		114,500		40,500		38,100		35,900
General administrative overhead*		184,600		52,400		81,600		50,600
Total fixed expenses		413,100		122,100		168,100		122,900
Net operating income (loss)	$	42,900	$	28,900	$	39,900	$	(25,900)

*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 $42,900 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

1a
	Current Total	Total If house keeing is Dropped	Difference: Net Operating Income
Sales	923000	670000	-253000
Variable expenses	467000	311000	156000
Contribution margin	456000	359000	-97000
Fixed expenses:
Depreciation	70100	70100	0
Liability insurance	43900	28200	15700
Program administrators’ salaries	114500	78600	35900
General administrative overhead	184600	184600	0
Total fixed expenses	413100	361500	51600
Net operating income (loss)	42900	-2500	-45400
Financial (disadvantage) $(45400)
1b
No, the housekeeping program should not be discontinued
2a
	Total	Home nursing	Meals on Wheels	House Keeping
Sales	923000	262000	408000	253000
Variable expenses	467000	111000	200000	156000
Contribution margin	456000	151000	208000	97000
Traceable fixed expenses:
Depreciation	70100	8700	40700	20700
Liability insurance	43900	20500	7700	15700
Program administrators’ salaries	114500	40500	38100	35900
Total traceable fixed expenses	228500	69700	86500	72300
Program segment margins	227500	81300	121500	24700
General administrative overhead	184600
Net operating income (loss)	42900
2b
Yes, a segmented income statement format would be more useful to management