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	$	900,000	$	260,000	$	400,000	$	240,000
Variable expenses		490,000		120,000		210,000		160,000
Contribution margin		410,000		140,000		190,000		80,000
Fixed expenses:
Depreciation		68,000		8,000		40,000		20,000
Liability insurance		42,000		20,000		7,000		15,000
Program administrators� salaries		115,000		40,000		38,000		37,000
General administrative overhead*		180,000		52,000		80,000		48,000
Total fixed expenses		405,000		120,000		165,000		120,000
Net operating income (loss)	$	5,000	$	20,000	$	25,000	$	(40,000)

*Allocated on the basis of program revenues.

The head administrator of Jackson County Senior Services, Judith Miyama, is concerned about the organization�s finances and considers the net operating income of $50,900 last year to be too small. (Last year�s results were very similar to the results for previous years and are representative of what would be expected in the future.) Therefore, she has asked for more information about the financial advisability of discontinuing the housekeeping program.

The depreciation in housekeeping is for a van that transports 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:

1a.	What is the impact on net operating income by discontinuing housekeeping program? (Input the amount as apositive value.)

in net operating income by

$

1b.	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

Concepts and reason

Incremental analysis: Incremental analysis is a technique that evaluates the cost difference between the alternatives by eliminating the sunk costs and the similar costs between the alternatives.

In other words, it is a type of decision making technique used by the company in determining the effect of net income and cost in choosing between various alternatives.

Unprofitable segment decision: Unprofitable segment decision refers to the decision as to whether to proceed with the unprofitable product line, or segment further, or drop it down.

Fundamentals

Keep or drop decision: The process of deciding whether to keep or drop the existing product line based on the profit, capacity and opportunity cost is known as keep or drop decision.

Operating income: It is the income earned from primary operations of a business. It explains the profitability of the company accurately and is also called as operating margin. Operating income is determined as the difference between sales revenue and variable expenses plus fixed expenses.

Segmented income statement: The income statement which breaks down the revenues and possible operational expenses among different kinds of products or divisions is called segmented income statement. It is generally prepared by the manufacturing company that has different product segments.

1a.

1b.

State whether the housekeeping program should be discontinuing or not.

The company should not discontinuing the housekeeping program because if it is dropped, the operating income will decrease by $28,000 and the total revenue will also decrease by $240,000.

2.

State whether the segmented income statement format would be more useful to management in assessing the long-run financial viability of the various services.

The segmented income statement format is presented as below:

Yes, the segmented income statement format would be more useful to management in assessing the long-run financial viability of the various services.

Ans: Part 1a

The net operating income of the company is decreased by $28,000 by discounting the housekeeping program.

Part 1b

The company should not discontinuing the housekeeping program.

Part 2

The segmented income statement format would be more useful to the management.