1a. What is the financial advantage (disadvantage) of discontinuing the housekee
ID: 2523418 • Letter: 1
Question
1a. What is the financial advantage (disadvantage) of discontinuing the housekeeping program? 1b. Should the housekeeping program be discontinued? 2a. Prepare a properly formatted segmented income statement. 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: HomeMeals Hou Revenues Variable expenses Contribution margin Fixed expensess 927,000 $263,000 $ 408,000 $256,00 465,000 113,000 198,000 154,000 462,000 150,000 210,000 102,000 69,400 43,500 21,000 116,100 185,400 52,600 20,300 7,20015,300 36, 800 1,200 Depreciation 8,500 40,600 Liability insurance 38,300 81,600 Program administrators' salaries 41,000 General administrative overhead* Total fixed expenses Net operating income (loss) 414.400 123,100 167,700 123,600 $ 47,600 26,900 $ 42,300 $(21,600) 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 $47600 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?Explanation / Answer
1-a) Fixed Cost is not relevant to ascertain continuation of business because its already incurred can not be reduced
(Values : $)
Particular
Current total
Total if House-keeping is dropped
Difference: Net Operating Income Increase or Decrease
Revenues
927000
671000
(256000)
Variable Expenses
465000
311000
154000
Contribution Margin
462000
360000
(102000)
Fixed Expenses:
Depreciation
69400
69400
-
Liability Insurance
43500
28200
15300
Administrator’s Salary
116100
79300
36800
General Administrative
Overhead
185400
185400
-
Total fixed expenses
414400
362300
52100
Net operating income
47600
(2300)
(49900)
1-b) No, the housekeeping program should be not discontinued. Since, it providing valuable services to seniors and also generating positive contribution margin.
2-a) (Values : $)
Particular
Total
Home nursing
Meals on wheels
Housekeeping
Revenues
927000
263000
408000
256000
Variable Expenses
465000
113000
198000
154000
Contribution Margin
462000
150000
210000
102000
Fixed Expenses:
Depreciation
69400
8500
40600
20300
Liability Insurance
43500
21000
7200
15300
Administrator’s Salary
116100
41000
38300
36800
Total fixed expenses
229000
70500
86100
72400
Product Line Margin
233000
79500
123900
29600
General Administrative
Overhead
185400
Net operating income
47600
2-b) Yes
Particular
Current total
Total if House-keeping is dropped
Difference: Net Operating Income Increase or Decrease
Revenues
927000
671000
(256000)
Variable Expenses
465000
311000
154000
Contribution Margin
462000
360000
(102000)
Fixed Expenses:
Depreciation
69400
69400
-
Liability Insurance
43500
28200
15300
Administrator’s Salary
116100
79300
36800
General Administrative
Overhead
185400
185400
-
Total fixed expenses
414400
362300
52100
Net operating income
47600
(2300)
(49900)
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