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	$	922,000	$	270,000	$	401,000	$	251,000
Variable expenses		465,000		119,000		196,000		150,000
Contribution margin		457,000		151,000		205,000		101,000
Fixed expenses:
Depreciation		70,300		8,800		40,700		20,800
Liability insurance		43,600		20,200		7,900		15,500
Program administrators’ salaries		115,200		40,100		38,600		36,500
General administrative overhead*		184,400		54,000		80,200		50,200
Total fixed expenses		413,500		123,100		167,400		123,000
Net operating income (loss)	$	43,500	$	27,900	$	37,600	$	(22,000)

*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 $43,500 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-a.

	Current Total	TOTAL	Difference: Financial
		Housekeeping is dropped	Advantage or (Decrease)
Revenues	922000	671000	-251000
Variable expenses	465000	315000	150000
Contribution margin	457000	356000	-101000
Fixed expenses:
Depreciation	70300	70300	0
Liability insurance	43600	28100	15500
Program administrators' salaries	115200	78700	36500
General administrative overhead	184400	184400	0
Total fixed expenses	413500	361500	52000
Net operating income (loss)	43500	-5500	-49000

Note: Depreciation on the van is a sunk cost and will have to be written off when the vans are donated.

1-b. No.

The Housekeeping program should not be discontinued since it would result in a decrease in net operating income of $49000.

2-a.

Segmented Income Statement
	Home Nursing	Meals On Wheels	Housekeeping	Totals
Revenues	270000	401000	251000	922000
Variable expenses	119000	196000	150000	465000
Contribution margin	151000	205000	101000	457000
Traceable fixed expenses:
Depreciation	8800	40700	20800	70300
Liability insurance	20200	7900	15500	43600
Program administrators' salaries	40100	38600	36500	115200
Total traceable fixed expenses	69100	87200	72800	229100
Program segment margins	81900	117800	28200	227900
General administrative overhead				184400
Net operating income (loss)				43500

2-b. Yes.

A segmented income statement is more useful since it shows the margins generated by each segment contributing towards the common fixed expenses of the organization.