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	$	919,000	$	266,000	$	401,000	$	252,000
Variable expenses		477,000		114,000		209,000		154,000
Contribution margin		442,000		152,000		192,000		98,000
Fixed expenses:
Depreciation		70,400		8,700		40,800		20,900
Liability insurance		43,200		20,700		7,100		15,400
Program administrators’ salaries		115,000		40,900		39,000		35,100
General administrative overhead*		183,800		53,200		80,200		50,400
Total fixed expenses		412,400		123,500		167,100		121,800
Net operating income (loss)	$	29,600	$	28,500	$	24,900	$	(23,800)

*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 $29,600 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? in Units ___________

1-b. Should the Housekeeping program be discontinued? yes or no

2-a. Prepare a properly formatted segmented income statement.

Prepare a properly formatted segmented income statement.

	Total	Home Nursing	Meals On Wheels	House-keeping
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 or NO

Answer 1

1-a. Financial disadvantage of discontinuing the Housekeeping program is $ 26600 (unavoidable fixed overhead 50400 - 23800 net segment loss) since General administrative overheads are unavoidable overheads. (The same can be seen in segmented income statement mentione in 2-a solution)

1-b. No, Housekeeping program should not be discontinued as loss is coming due to fixed allocated unavoidable overhaeds.

2-a.

2-b. Yes, Management can decide about continuouty of various service lines on the basis of segmented income statement.