Exercise 10-2 Dropping or Retaining a Segment [LO2]

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 seniorshome 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	$	932,000	$	270,000	$	408,000	$	254,000
Variable expenses		467,000		112,000		198,000		157,000
Contribution margin		465,000		158,000		210,000		97,000
Fixed expenses:
Depreciation		70,300		8,700		40,700		20,900
Liability insurance		43,000		20,300		7,400		15,300
Program administrators salaries		114,700		40,700		39,000		35,000
General administrative overhead*		186,400		54,000		81,600		50,800
Total fixed expenses		414,400		123,700		168,700		122,000
Net operating income (loss)	$	50,600	$	34,300	$	41,300	$	(25,000)

*Allocated on the basis of program revenues.

The head administrator of Jackson County Senior Services, Judith Miyama, is concerned about the organizations finances and considers the net operating income of $50,600 last year to be too small. (Last years 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 a positive value.)

(Click to select)IncreaseDecrease 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