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	$	927,000	$	266,000	$	406,000	$	255,000
Variable expenses		479,000		120,000		205,000		154,000
Contribution margin		448,000		146,000		201,000		101,000
Fixed expenses:
Depreciation		69,900		8,500		40,800		20,600
Liability insurance		44,200		20,800		7,500		15,900
Program administrators’ salaries		115,200		40,500		38,600		36,100
General administrative overhead*		185,400		53,200		81,200		51,000
Total fixed expenses		414,700		123,000		168,100		123,600
Net operating income (loss)	$	33,300	$	23,000	$	32,900	$	(22,600)

*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 $33,300 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.

	Current total	Total if housekeeping is discontinued
Revenues	$927,000	$672,000
Variable expenses	479,000	325,000
Contribution margin	448,000	347,000
Fixed expenses:
Depreciation	69,900	49,300
Liability insurance	44,200	28,300
Program administrators' salaries	115,200	79,100
General administrative overhead	185,400	185,400
Total fixed expenses	414,700	342,100
Net operating income (loss)	$33,300	$4,900

The financial disadvantage of discontinuing housekeeping program is $28,400 (33,300-4,900).

1-b.

No, the housekeeping should not be discontinued.

2-a.

	Total	Home nursing	Meals on wheels	House-keeping
Revenues	$927,000	$266,000	$406,000	$255,000
Variable expenses	479,000	120,000	205,000	154,000
Contribution margin	448,000	146,000	201,000	101,000
Fixed expenses (traceable)
Depreciation	69,900	8,500	40,800	20,600
Liability insurance	44,200	20,800	7,500	15,900
Program administrators' salaries	115,200	40,500	38,600	36,100
Total fixed expenses (traceable)	229,300	69,800	86,900	72,600
Segment margin	218,700	76,200	114,100	28,400
General administrative overhead	185,400
Net income	$33.300

2-b.

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