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	$	917,000	$	262,000	$	404,000	$	251,000
Variable expenses		477,000		112,000		209,000		156,000
Contribution margin		440,000		150,000		195,000		95,000
Fixed expenses:
Depreciation		69,700		8,900		40,600		20,200
Liability insurance		43,300		20,600		7,200		15,500
Program administrators’ salaries		116,600		41,000		38,600		37,000
General administrative overhead*		183,400		52,400		80,800		50,200
Total fixed expenses		413,000		122,900		167,200		122,900
Net operating income (loss)	$	27,000	$	27,100	$	27,800	$	(27,900)

*Allocated on the basis of program revenues.

The head administrator of Jackson County Senior Services, Judith Miyama, is concerned about the organization’s finances and considers the net operating income of $27,000 last year to be razor-thin. (Last year's results were very similar to the results for previous years and are representative of what would be expected in the future.) She feels that the organization should be building its financial reserves at a more rapid rate in order to prepare for the next inevitable recession. After seeing the above report, Ms. Miyama asked for more information about the financial advisability of perhaps 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 impact on net operating income by discontinuing housekeeping program? (Decreases should be indicated by a minus sign.)

          

1-b.	Should the housekeeping program be discontinued?
	Yes No

  

2-a.	Prepare a 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.
	Yes No

Answer 1

Req 1a		Current Total	Total if housekeeping is dropped	Difference Net Operating income Income increase/(Decrease)
	Sales	917,000	666,000	(251,000)
	Variable manufacturing and selling Expenses	477,000	321,000	(156,000)
	Contribution Margin	440,000	345,000	(95,000)
	Traceable Fixed Expenses:
	Depreciation	69,700	69,700	-
	Liability Insurance	43,300	27,800	(15,500)
	Program administrator salary	116,600	79,600	(37,000)
	General admin overhead	183,400	183,400	-
	Total fixed expense	413,000	360,500	(52,500)
	Net Operating Income / (Loss)	27,000	(15,500)	(42,500)
	Financial Disadvantage	(42,500)
Req 1b	No
Req 2A		Totals	Home nursing	Meals on wheels	House Keeping
	Sales	917,000	262,000	404,000	251,000
	Variable manufacturing and selling Expenses	477,000	112,000	209,000	156,000
	Contribution Margin	440,000	150,000	195,000	95,000
	Traceable Fixed Expenses:
	Depreciation	69,700	8,900	40,600	20,200
	Liability Insurance	43,300	20,600	7,200	15,500
	Program administrator salary	116,600	41,000	38,600	37,000
	Total Traceable fixed expense	229,600	70,500	86,400	72,700
	Program Segment Margin	210,400	79,500	108,600	22,300
	General admin overhead	183,400
	Net Operating Income / (Loss)	27,000
Req 2b	Yes