Problem 11-19 Dropping or Retaining a Segment [LO11-2]

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 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	$	925,000	$	268,000	$	402,000	$	255,000
Variable expenses		474,000		114,000		207,000		153,000
Contribution margin		451,000		154,000		195,000		102,000
Fixed expenses:
Depreciation		69,800		8,900		40,800		20,100
Liability insurance		43,500		20,900		7,200		15,400
Program administrators salaries		115,900		40,400		38,800		36,700
General administrative overhead*		185,000		53,600		80,400		51,000
Total fixed expenses		414,200		123,800		167,200		123,200
Net operating income (loss)	$	36,800	$	30,200	$	27,800	$	(21,200)

*Allocated on the basis of program revenues.

The head administrator of Jackson County Senior Services, Judith Miyama, considers last years net operating income of $36,800 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?