Exercise 122 Dropping or Retaining a Segment [L02] Cumberland County Senior Services is a nonprofit organization devoted to providing essential services to seniors who live in their own homes within the Cumberland County area. Three services are provided for seniorshome 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 tests ordered by their physicians The Meals on Wheels program delivers a hot meal once a day to each senior enrolled in the program. The housekeeping service provides weekly housecleaning and maintenance services. Data on revenue and expenses for the past year follow: Home Meals on House Total Nursing wheels keeping Revenues $945,000 $273,000 $420,000 $252,000 Variable expenses 518,500 127,000 222,500 169,000 Contribution margin 426,500 146,000 197,500 83,000 Fixed expenses: Depreciation 69,900 8,400 40,750 20,750 Liability insurance 43,850 20,750 7,500 15,600 Program administrators' salaries 118,250 41,250 38,750 38,250 General administrative overhead* 189,000 54,600 84,000 50,400 Total fixed expenses 421,000 125,000 171,000 125,000 Operating income (loss) 5 5,500 $ 21,000 5 25:500 $(42:000) *Allocated on the basis of program revenues. The head administrator of Cumberland County Senior Services, Judith Ewa, is concerned about the organization's finances and considers the operating income of $5,500 last year to be razorthin. (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, 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 fromjob tojob. Ifthe 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 ofthe program administrator would be avoided. Required: 1-a. Compute the change in net operating income for the company as a whole if housekeeping program be discontinued. ::| 1-b. Should the housekeeping program be discontinued? 0 Yes O No 2. Would a segmented income statement format be more useful to management in assessing the longrun nancial viability of the various services? O Yes O No