ackson County Senior Services is a nonprofit organization devoted to providing e
ID: 2437901 • Letter: A
Question
ackson 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:
*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 $56,200 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?
Total Home Nursing Meals On Wheels House-keeping Revenues $ 927,000 $ 265,000 $ 409,000 $ 253,000 Variable expenses 457,000 112,000 192,000 153,000 Contribution margin 470,000 153,000 217,000 100,000 Fixed expenses: Depreciation 69,300 8,900 40,100 20,300 Liability insurance 43,600 20,900 7,300 15,400 Program administrators’ salaries 115,500 40,800 38,700 36,000 General administrative overhead* 185,400 53,000 81,800 50,600 Total fixed expenses 413,800 123,600 167,900 122,300 Net operating income (loss) $ 56,200 $ 29,400 $ 49,100 $ (22,300)
Explanation / Answer
Answer:
1-a. What is the financial advantage (disadvantage) of discontinuing the Housekeeping program?
Total
Total if
House keeping
Program dropped
Difference net
operating
income increase or
(decrease)
Revenues
927000
674000
-253000
Variable expenses
457000
304000
153000
Contribution margin
470000
370000
-100000
Fixed expenses:
Depreciation
69300
69300
0
Liability insurance
43600
28200
15400
Program administrators’ salaries
115500
79500
36000
General administrative overhead*
185400
185400
0
Total fixed expenses
413800
362400
51400
Net operating income (loss)
56200
7600
-48600
___________________________________________
1-b. Should the Housekeeping program be discontinued?
Answer: NO
Housekeeping program should not be discontinued
_________________________________________________-
2-a. Prepare a properly formatted segmented income statement.
Total
Home Nursing
Meals On Wheels
House-
keeping
Revenues
927000
265000
409000
253000
Variable expenses
457000
112000
192000
153000
Contribution margin
470000
153000
217000
100000
Traceable Fixed expenses:
Depreciation
69300
8900
40100
20300
Liability insurance
43600
20900
7300
15400
Program administrators’ salaries
115500
40800
38700
36000
Total Traceable Fixed expenses:
228400
70600
86100
71700
Program segment margin
241600
82400
130900
28300
General administrative overhead*
185400
Net operating income (loss)
56200
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: Yes
Total
Total if
House keeping
Program dropped
Difference net
operating
income increase or
(decrease)
Revenues
927000
674000
-253000
Variable expenses
457000
304000
153000
Contribution margin
470000
370000
-100000
Fixed expenses:
Depreciation
69300
69300
0
Liability insurance
43600
28200
15400
Program administrators’ salaries
115500
79500
36000
General administrative overhead*
185400
185400
0
Total fixed expenses
413800
362400
51400
Net operating income (loss)
56200
7600
-48600
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