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Exercise 12-2 Dropping or Retaining a Segment (5 marks) Cumberland County Senior Services is a non-profit organization devoted to providing essential services to seniors who

Exercise 12-2 Dropping or Retaining a Segment (5 marks)

Cumberland County Senior Services is a non-profit organization devoted to providing essential services to seniors who live in their own homes within the Cumberland County area. Three services are provided for seniors home nursing, Meals on Wheels and housekeeping. In the home nursing program, nurses visit seniors on a regular basis to check on their general health and to perform test ordered by their physicians. The Meals on Wheels program delivers a not meal once a day to each senior enrolled in the program. The housekeeping service provides weekly housecleaning and maintenance services. Data on revenue and expense for the past year follows:

Total

Home Nursing

Meals on Wheels

Housekeeping

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

Operating income (loss)

$ 5,000

$ 20,000

$ 25,000

$ (40,000)

*Allocated on the basis of program revenues

The head administrator of Cumberland County Senior Services, Judith Ewa, is concerned about the organizations finances and considers the operating income of $5,000 last year to be razor-thin. (Last years 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, Ewa asked for more information about the financial advisability of discontinuing the housekeeping program.

The depreciation in the housekeeping category 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. Depreciation charges assume zero salvage value. None of the general and 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

Should the housekeeping program be discontinued? Explain. Show computations to support your answer. Use the Compare CM to Fixed Costs method.v

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