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	$	932,000	$	265,000	$	408,000	$	259,000
Variable expenses		472,000		111,000		203,000		158,000
Contribution margin		460,000		154,000		205,000		101,000
Fixed expenses:
Depreciation		69,900		8,600		40,400		20,900
Liability insurance		43,700		20,400		7,800		15,500
Program administrators’ salaries		114,700		40,600		38,200		35,900
General administrative overhead*		186,400		53,000		81,600		51,800
Total fixed expenses		414,700		122,600		168,000		124,100
Net operating income (loss)	$	45,300	$	31,400	$	37,000	$	(23,100)

*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 $45,300 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

1a
	Current Total	Total If house keeping is Dropped	Difference: Net Operating Income
Sales	932000	673000	-259000
Variable expenses	472000	314000	158000
Contribution margin	460000	359000	-101000
Fixed expenses:
Depreciation	69900	69900	0
Liability insurance	43700	28200	15500
Program administrators’ salaries	114700	78800	35900
General administrative overhead	186400	186400	0
Total fixed expenses	414700	363300	51400
Net operating income (loss)	45300	-4300	-49600
Financial (disadvantage) $(49600)
1b
No, the housekeeping program should not be discontinued
2a
	Total	Home nursing	Meals on Wheels	House Keeping
Sales	932000	265000	408000	259000
Variable expenses	472000	111000	203000	158000
Contribution margin	460000	154000	205000	101000
Traceable fixed expenses:
Depreciation	69900	8600	40400	20900
Liability insurance	43700	20400	7800	15500
Program administrators’ salaries	114700	40600	38200	35900
Total traceable fixed expenses	228300	69600	86400	72300
Program segment margins	231700	84400	118600	28700
General administrative overhead	186400
Net operating income (loss)	45300
2b
Yes, a segmented income statement would be more useful