Jackson County Senior Services is a nonprofit organization devoted to providing
ID: 2530033 • Letter: J
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:
*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 $34,500 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 $ 921,000 $ 267,000 $ 402,000 $ 252,000 Variable expenses 474,000 112,000 206,000 156,000 Contribution margin 447,000 155,000 196,000 96,000 Fixed expenses: Depreciation 69,300 8,600 40,600 20,100 Liability insurance 43,800 20,500 7,300 16,000 Program administrators’ salaries 115,200 40,700 39,000 35,500 General administrative overhead* 184,200 53,400 80,400 50,400 Total fixed expenses 412,500 123,200 167,300 122,000 Net operating income (loss) $ 34,500 $ 31,800 $ 28,700 $ (26,000)
Explanation / Answer
1a Total total if house keeping is dropped difference Revenues $ 921,000 $ 669,000 $ 252,000 Variable expenses 474,000 318,000 156,000 Contribution margin 447,000 351,000 96,000 Fixed expenses: Depreciation 69,300 49,200 20,100 Liability insurance 43,800 27,800 16,000 Program administrators’ salaries 115,200 79,700 35,500 General administrative overhead* 184,200 184,200 0 Total fixed expenses 412,500 290,500 122,000 Net operating income (loss) $ 34,500 10,100 24,400 *Includes pro-rated loss on disposal of the van if it is donated to a charity Depreciation on the van is a sunk cost and the van has no salvage value since it would be donated to another organization. The general administrative overhead is allocated and none of it would be avoided if the program were dropped; thus it is not relevant to the decision. 1b No, the housekeeping program should not be discontinued. It is actually generating a positive program segment margin and is, of course, providing a valuable service to seniors. 2a Total Home Nursing Meals On Wheels House- keeping Revenues $ 921,000 $ 267,000 $ 402,000 $ 252,000 Variable expenses 474,000 112,000 206,000 156,000 Contribution margin 447,000 155,000 196,000 96,000 Traceable Fixed expenses: Depreciation 69,300 8,600 40,600 20,100 Liability insurance 43,800 20,500 7,300 16,000 Program administrators’ salaries 115,200 40,700 39,000 35,500 Total Traceable Fixed expenses: 228,300 69,800 86,900 71,600 Program segment margin 218,700 85,200 109,100 24,400 General administrative overhead 184,200 Net operating income (loss) $ 34,500 2b yes management often finds it is important to classify expenses as fixed or variable and as direct or indirect to the segment. These classifications may be more useful to management than the traditional classifications of cost of goods sold, operating expenses, and nonoperating expenses.
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