Question

Problem 10-19A Dropping or Retaining a Segment [LO10-2]

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	$917,000		$261,000		$403,000		$253,000
Variable expenses	465,000		120,000		192,000		153,000
	__________________________________________
Contribution margin	452,000		141,000		211,000		100,000
	__________________________________________
Fixed expenses:
Depreciation	69,500		8,500		40,500		20,500
Liability insurance	43,900		20,800		7,100		16,000
Program administrators’ salaries	115,500		40,800		38,200		36,500
General administrative overhead*	183,400		52,200		80,600		50,600
	_________________________________________
Total fixed expenses	412,300		122,300		166,400		123,600
	_________________________________________
Net operating income (loss)	$39,700		$18,700		$44,600		$(23,600)
	_________________________________________

*Allocated on the basis of program revenues.

The head administrator of Jackson County Senior Services, Judith Miyama, is concerned about the organization’s finances and considers the net operating income of $39,700 last year to be razor-thin. (Last year's results were very similar to the results for previous years and are representative of what would be expected in the future.) She feels that the organization should be building its financial reserves at a more rapid rate in order to prepare for the next inevitable recession. After seeing the above report, Ms. Miyama asked for more information about the financial advisability of perhaps 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 impact on net operating income by discontinuing housekeeping program? (Decreases should be indicated by a minus sign.)

	Total If Difference: Net Operating Current Total Housekeeping Is Dropped Income Increase or (Decrease) Revenues                                  Variable expenses Contribution margin Fixed expenses: Depreciation Liability insurance Program administrators’ salaries General administrative overhead Total fixed expenses Net operating income (loss)

1-b.

	Should the housekeeping program be discontinued?
	Yes No

  

2-a.	Prepare a segmented income statement.

	Home Nursing	Meals On Wheels	House keeping	Totals
Revenues
Variable expenses
Contribution margin
Traceable fixed expenses:
Depreciation
Liability insurance
Program administrators’ salaries
Total traceable fixed expenses
Program segment margins
General administrative overhead
Net operating income (loss)

2-b.

	Would a segmented income statement format be more useful to management in assessing the long-run financial viability of the various services.
	Yes No

Answer 1

• All working forms part of the answer
• All Amounts are in $
• Requirement 1 ‘a’

		Total If	Difference: Net Operating
	Current Total	Housekeeping Is Dropped	Income Increase or (Decrease)
Revenues	917000	664000	-253000
Variable expenses	465000	312000	153000
Contribution margin	452000	352000	-100000
Fixed expenses:
Depreciation	69500	49000	20500
Liability insurance	43900	27900	16000
Program administrators’ salaries	115500	79000	36500
General administrative overhead	183400	183400	0
Total fixed expenses	412300	339300	73000
Net operating income (loss)	$39700	$12700	$(27000)

• Requirement 1’b’

NO, the House keeping program should not be discontinued as discontinuing it will lead to fall in Net Income by $27000

• Requirement 2’a’

	Home Nursing	Meals On Wheels	House keeping	Totals
Revenues	261000	403000	253000	917000
Variable expenses	120000	192000	153000	465000
Contribution margin	141000	211000	100000	452000
Traceable fixed expenses:
Depreciation	8500	40500	20500	69500
Liability insurance	20800	7100	16000	43900
Program administrators’ salaries	40800	38200	36500	115500
Total traceable fixed expenses	70100	85800	73000	228900
Program segment margins	$70900	$125200	$27000	$223100
General administrative overhead				183400
Net operating income (loss)				$39700

• Requirement 2 ‘b’

YES, segmented income statement format be more useful to management in assessing the long-run financial viability of the various services, as it gives Product /Segment margin before Genera Fixed overheads are allocated.