Question

Problem 11-19 Dropping or Retaining a Segment [LO11-2]

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	$	919,000	$	265,000	$	402,000	$	252,000
Variable expenses		477,000		119,000		207,000		151,000
Contribution margin		442,000		146,000		195,000		101,000
Fixed expenses:
Depreciation		69,600		8,600		40,200		20,800
Liability insurance		43,800		20,600		7,300		15,900
Program administrators’ salaries		114,800		40,000		38,400		36,400
General administrative overhead*		183,800		53,000		80,400		50,400
Total fixed expenses		412,000		122,200		166,300		123,500
Net operating income (loss)	$	30,000	$	23,800	$	28,700	$	(22,500)

*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 $30,000 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

Solution 1a:

Financial disadvantage = $48,700

Solution 1b:

No, the Housekeeping program should not be discontinued.

Solution 2a:

Solution 2b:

Yes, a segmented income statement format would be more useful to management in assessing the long-run financial viability of the various services.