Question

In: Accounting

Jackson County Senior Services is a nonprofit organization devoted to providing essential services to seniors who...

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 $ 926,000 $ 267,000 $ 400,000 $ 259,000
Variable expenses 466,000 120,000 193,000 153,000
Contribution margin 460,000 147,000 207,000 106,000
Fixed expenses:
Depreciation 70,200 8,900 40,700 20,600
Liability insurance 43,600 20,300 8,000 15,300
Program administrators’ salaries 115,000 40,800 38,700 35,500
General administrative overhead* 185,200 53,400 80,000 51,800
Total fixed expenses 414,000 123,400 167,400 123,200
Net operating income (loss) $ 46,000 $ 23,600 $ 39,600 $ (17,200)

*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 $46,000 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?

Solutions

Expert Solution

Answer 1

Financial advantage (disadvantage) of discontinuing the Housekeeping program:

Loss of Contribution Margin         (1,06,000)
Savings in:
Liability Insurance               20,600
Program administrators’ salaries               35,500
Net Financial advantage / (disadvantage)             (49,900)

Answer 2

Since there is net financial disadvantage of discontinuing housekeeping program, it should not be discontinued.

Answer 3

Segmented Income Statement

Total Home Nursing Meals on Wheels Housekeeping
Revenues           9,26,000             2,67,000                   4,00,000              2,59,000
Variable Expenses           4,66,000             1,20,000                   1,93,000              1,53,000
Contribution Margin           4,60,000             1,47,000                   2,07,000              1,06,000
Traceable Fixed Costs:
Depreciation               70,200                   8,900                       40,700                 20,600
Liability Insurance               43,600                 20,300                         8,000                 15,300
Program administrators’ salaries           1,15,000                 40,800                       38,700                 35,500
Total Traceable Fixed Costs           2,28,800                 70,000                       87,400                 71,400
Program Segment Margin           2,31,200                 77,000                   1,19,600                 34,600
Non- Traceable Fixed Cost           1,85,200
Net operating income (loss)               46,000

Answer 4

Since the segmented income statement format takes into account segment specific fixed cost that are directly traceale, it would be more useful to management in assessing the long-run financial viability of the various services


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