Problem 10-19A Dropping or Retaining a Segment [LO10-2] Jackson County Senior Se
ID: 2557601 • Letter: P
Question
Problem 10-19A Dropping or Retaining a Segment [LO10-2]
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:
*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 $39,700 last year to be razor-thin. (Last year's results were very similar to the results for previous years and are representative of what would be expected in the future.) She feels that the organization should be building its financial reserves at a more rapid rate in order to prepare for the next inevitable recession. After seeing the above report, Ms. Miyama asked for more information about the financial advisability of perhaps 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.
What is the impact on net operating income by discontinuing housekeeping program? (Decreases should be indicated by a minus sign.)
1-b.
Prepare a 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 $917,000 $261,000 $403,000 $253,000 Variable expenses 465,000 120,000 192,000 153,000 __________________________________________ Contribution margin 452,000 141,000 211,000 100,000 __________________________________________ Fixed expenses: Depreciation 69,500 8,500 40,500 20,500 Liability insurance 43,900 20,800 7,100 16,000 Program administrators’ salaries 115,500 40,800 38,200 36,500 General administrative overhead* 183,400 52,200 80,600 50,600 _________________________________________ Total fixed expenses 412,300 122,300 166,400 123,600 _________________________________________ Net operating income (loss) $39,700 $18,700 $44,600 $(23,600) _________________________________________
Explanation / Answer
Answer
Total If
Difference: Net Operating
Current Total
Housekeeping Is Dropped
Income Increase or (Decrease)
Revenues
917000
664000
-253000
Variable expenses
465000
312000
153000
Contribution margin
452000
352000
-100000
Fixed expenses:
Depreciation
69500
49000
20500
Liability insurance
43900
27900
16000
Program administrators’ salaries
115500
79000
36500
General administrative overhead
183400
183400
0
Total fixed expenses
412300
339300
73000
Net operating income (loss)
$39700
$12700
$(27000)
NO, the House keeping program should not be discontinued as discontinuing it will lead to fall in Net Income by $27000
Home Nursing
Meals On Wheels
House keeping
Totals
Revenues
261000
403000
253000
917000
Variable expenses
120000
192000
153000
465000
Contribution margin
141000
211000
100000
452000
Traceable fixed expenses:
Depreciation
8500
40500
20500
69500
Liability insurance
20800
7100
16000
43900
Program administrators’ salaries
40800
38200
36500
115500
Total traceable fixed expenses
70100
85800
73000
228900
Program segment margins
$70900
$125200
$27000
$223100
General administrative overhead
183400
Net operating income (loss)
$39700
YES, segmented income statement format be more useful to management in assessing the long-run financial viability of the various services, as it gives Product /Segment margin before Genera Fixed overheads are allocated.
Total If
Difference: Net Operating
Current Total
Housekeeping Is Dropped
Income Increase or (Decrease)
Revenues
917000
664000
-253000
Variable expenses
465000
312000
153000
Contribution margin
452000
352000
-100000
Fixed expenses:
Depreciation
69500
49000
20500
Liability insurance
43900
27900
16000
Program administrators’ salaries
115500
79000
36500
General administrative overhead
183400
183400
0
Total fixed expenses
412300
339300
73000
Net operating income (loss)
$39700
$12700
$(27000)
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