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	$	924,000	$	266,000	$	400,000	$	258,000
Variable expenses		455,000		111,000		193,000		151,000
Contribution margin		469,000		155,000		207,000		107,000
Fixed expenses:
Depreciation		69,800		8,500		40,600		20,700
Liability insurance		43,100		20,800		7,200		15,100
Program administrators’ salaries		115,300		40,900		38,600		35,800
General administrative overhead*		184,800		53,200		80,000		51,600
Total fixed expenses		413,000		123,400		166,400		123,200
Net operating income (loss)	$	56,000	$	31,600	$	40,600	$	(16,200)

*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 $56,000 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.)
	Current total Total if housekeeping is dropped. difference Revenues Variable expenses Contribution margin Fixed expenses: Depreciation Liability insurance Program administrators’ salaries General administrative overhead Total fixed expenses Net operating income (loss)

          

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

  

2-a.	Prepare a segmented income statement.
	Home Nursing Meals On Wheels House- keeping Toals Revenues Variable expenses Contribution margin Traceable fixed expenses: Depreciation Liability insurance Program administrators’ salaries Total traceable fixed expenses Program segment margins General administrative overhead Net operating income (loss)

           

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

				Current	house	income
				total	keeping	increase or
					Dropped	(decrease)
	Revenues			924,000	666000	-258,000
	Variable expenses			455,000	304000	151,000
	Conribution margin			469,000	362000	-107,000
	Fixed expenses:
	Depreciation			69,800	69,800	0
	liability insurance			43,100	28000	15,100
	program administrator's salaries			115,300	79500	35,800
	General administrative overhead			184,800	184,800	0
	total fixed expense			413,000	362,100	50,900
	Net operating income(loss)			56,000	-100	-56,100
1-b)	No
2-a)	Segmented income statement
				home	Meals on	house	Totals
				nursing	wheels	keeping
	Revenues			266,000	400,000	258,000	924,000
	Variable expenses			111,000	193,000	151,000	455,000
	Conribution margin			155,000	207,000	107,000	469,000
	Traceable fixed expenses
	Depreciation			8,500	40,600	20,700	69,800
	liability insurance			20,800	7,200	15,100	43,100
	program administrator's salaries			40,900	38,600	35,800	115,300
	total traceable fixed expenses			70,200	86,400	71,600	228,200
	program segment margins			84,800	120,600	35,400	240,800
	General administrative OH						184,800
	net operating income(loss)						56,000
2-b)	Yes