Question

Cumberland County Senior Services is a non-profit organization devoted to providing essential services to seniors who live in their own homes within the Cumberland County area. Three services are provided for seniors—home nursing, Meals on Wheels, and housekeeping. In the home nursing program, nurses visit seniors on a regular basis to check on their general health and to perform tests ordered by their physicians. The Meals on Wheels program delivers a hot meal once a day to each senior enrolled in the program. The housekeeping service provides weekly housecleaning and maintenance services. Data on revenue and expenses for the past year follow:

	Total			Home Nursing			Meals on Wheels			House- keeping
Revenues	$	927,000		$	267,800		$	412,000		$	247,200
Variable expenses		507,100			124,200			217,500			165,400
Contribution margin		419,900			143,600			194,500			81,800
Fixed expenses:
Depreciation		69,140			8,240			40,450			20,450
Liability insurance		43,110			20,450			7,300			15,360
Program administrators’ salaries		116,950			40,750			38,450			37,750
General administrative overhead*		185,400			53,560			82,400			49,440
Total fixed expenses		414,600			123,000			168,600			123,000
Operating income (loss)	$	5,300		$	20,600		$	25,900		$	(41,200	)

*Allocated on the basis of program revenues.

     The head administrator of Cumberland County Senior Services, Judith Ewa, is concerned about the organization’s finances and considers the operating income of $5,300 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, Ewa asked for more information about the financial advisability of discontinuing the
housekeeping program.

     The depreciation in the housekeeping category 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. Depreciation charges assume zero salvage value. 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. Compute the change in net operating income for the company as a whole if housekeeping program be discontinued.

1-b. Should the housekeeping program be discontinued?

• Yes

• No

2. 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