Question

Problem 11-19 Dropping or Retaining a Segment [LO11-2]

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	$	929,000	$	265,000	$	407,000	$	257,000
Variable expenses		472,000		118,000		202,000		152,000
Contribution margin		457,000		147,000		205,000		105,000
Fixed expenses:
Depreciation		69,500		8,500		40,600		20,400
Liability insurance		44,100		20,400		8,000		15,700
Program administrators’ salaries		115,800		40,700		38,300		36,800
General administrative overhead*		185,800		53,000		81,400		51,400
Total fixed expenses		415,200		122,600		168,300		124,300
Net operating income (loss)	$	41,800	$	24,400	$	36,700	$	(19,300)

*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 $41,800 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	929000	672000	-257000
Variable expenses	472000	320000	152000
Contribution margin	457000	352000	-105000
Fixed expenses:
Depreciation	69500	69500	0
Liability insurance	44100	28400	15700
Program administrators’ salaries	115800	79000	36800
General administrative overhead	185800	185800	0
Total fixed expenses	415200	362700	52500
Net operating income (loss)	41800	-10700	-52500
Financial (disadvantage) $(52500)
1b
No, the housekeeping program should not be discontinued
2a
	Total	Home nursing	Meals on Wheels	House Keeping
Sales	929000	265000	407000	257000
Variable expenses	472000	118000	202000	152000
Contribution margin	457000	147000	205000	105000
Traceable fixed expenses:
Depreciation	69500	8500	40600	20400
Liability insurance	44100	20400	8000	15700
Program administrators’ salaries	115800	40700	38300	36800
Total traceable fixed expenses	229400	69600	86900	72900
Program segment margins	227600	77400	118100	32100
General administrative overhead	185800
Net operating income (loss)	41800
2b
Yes, a segmented income statement would be more useful