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 $ 402,000 $ 253,000 Variable expenses 465,000 117,000 192,000 156,000 Contribution margin 452,000 145,000 210,000 97,000 Fixed expenses: Depreciation 70,400 9,000 40,600 20,800 Liability insurance 44,200 20,600 7,700 15,900 Program administrators’ salaries 116,000 40,900 38,600 36,500 General administrative overhead* 183,400 52,400 80,400 50,600 Total fixed expenses 414,000 122,900 167,300 123,800 Net operating income (loss) $ 38,000 $ 22,100 $ 42,700 $ (26,800) *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 $38,000 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

1-a. What is the financial advantage (disadvantage) of discontinuing the Housekeeping program?

	With House Keeping	Without House Keeping
Revenues	253,000	0
Variable expenses	156,000	0
Contribution margin	97,000	0
Fixed expenses:	0	0
Depreciation	20,800	20,800
Liability insurance	15,900	0
Program administrators’ salaries	36,500	0
General administrative overhead*	50,600	50,600
Total fixed expenses	123,800	71,400
Net operating income (loss)	-26,800	-71,400

Financial Disadvantage = 44600 (71400-26800)

1-b. Should the Housekeeping program be discontinued?.

                No

Housekeeping program should notbe discontinued

___________________________________________________________-

2-a. Prepare a properly formatted segmented income statement.

	Total	Home Nursing	Meals On Wheels	House-
				keeping
Revenues	917,000	262,000	402000	253,000
Variable expenses	465,000	117,000	192000	156,000
Contribution margin	452,000	145,000	210,000	97,000
Tracable Fixed expenses:
Depreciation	70,400	9,000	40600	20,800
Liability insurance	44,200	20,600	7700	15,900
Program administrators’ salaries	116,000	40,900	38600	36,500
Total Tracable Fixed expenses:	230,600	70,500	86,900	73,200
Segment margin	221,400	74,500	123,100	23,800
General administrative overhead*	183,400
Net operating income (loss)	38,000

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:

Yes

A segmented income statement format be more useful to management in assessing the long-run financial viability of the various services