In: Accounting
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 |
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Revenues | $ | 921,000 | $ | 267,000 | $ | 402,000 | $ | 252,000 |
Variable expenses | 474,000 | 112,000 | 206,000 | 156,000 | ||||
Contribution margin | 447,000 | 155,000 | 196,000 | 96,000 | ||||
Fixed expenses: | ||||||||
Depreciation | 69,300 | 8,600 | 40,600 | 20,100 | ||||
Liability insurance | 43,800 | 20,500 | 7,300 | 16,000 | ||||
Program administrators’ salaries | 115,200 | 40,700 | 39,000 | 35,500 | ||||
General administrative overhead* | 184,200 | 53,400 | 80,400 | 50,400 | ||||
Total fixed expenses | 412,500 | 123,200 | 167,300 | 122,000 | ||||
Net operating income (loss) | $ | 34,500 | $ | 31,800 | $ | 28,700 | $ | (26,000) |
*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 $34,500 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?
1a | Total | total if house keeping is dropped | difference | |||||||
Revenues | $ | 921,000 | $ | 669,000 | $ | 252,000 | ||||
Variable expenses | 474,000 | 318,000 | 156,000 | |||||||
Contribution margin | 447,000 | 351,000 | 96,000 | |||||||
Fixed expenses: | ||||||||||
Depreciation | 69,300 | 49,200 | 20,100 | |||||||
Liability insurance | 43,800 | 27,800 | 16,000 | |||||||
Program administrators’ salaries | 115,200 | 79,700 | 35,500 | |||||||
General administrative overhead* | 184,200 | 184,200 | 0 | |||||||
Total fixed expenses | 412,500 | 290,500 | 122,000 | |||||||
Net operating income (loss) | $ | 34,500 | 10,100 | 24,400 | ||||||
*Includes pro-rated loss on disposal of the van if it is donated to a charity | ||||||||||
Depreciation on the van is a sunk cost and the van has no salvage value since | ||||||||||
it would be donated to another organization. The general administrative | ||||||||||
overhead is allocated and none of it would be avoided if the program were | ||||||||||
dropped; thus it is not relevant to the decision. | ||||||||||
1b | No, the housekeeping program should not be discontinued. It is actually | |||||||||
generating a positive program segment margin and is, of course, providing a | ||||||||||
valuable service to seniors. | ||||||||||
2a | ||||||||||
Total | Home Nursing | Meals On Wheels | House- | |||||||
keeping | ||||||||||
Revenues | $ | 921,000 | $ | 267,000 | $ | 402,000 | $ | 252,000 | ||
Variable expenses | 474,000 | 112,000 | 206,000 | 156,000 | ||||||
Contribution margin | 447,000 | 155,000 | 196,000 | 96,000 | ||||||
Traceable Fixed expenses: | ||||||||||
Depreciation | 69,300 | 8,600 | 40,600 | 20,100 | ||||||
Liability insurance | 43,800 | 20,500 | 7,300 | 16,000 | ||||||
Program administrators’ salaries | 115,200 | 40,700 | 39,000 | 35,500 | ||||||
Total Traceable Fixed expenses: | 228,300 | 69,800 | 86,900 | 71,600 | ||||||
Program segment margin | 218,700 | 85,200 | 109,100 | 24,400 | ||||||
General administrative overhead | 184,200 | |||||||||
Net operating income (loss) | $ | 34,500 | ||||||||
2b | yes | management often finds it is important to classify expenses | ||||||||
as fixed or variable and as direct or indirect to the segment. | ||||||||||
These classifications may be more useful to management than the | ||||||||||
traditional classifications of cost of goods sold, operating expenses, and nonoperating expenses. | ||||||||||