EXERCISE 12–2 Dropping or Retaining a Segment [LO2] Cumberland County Senior Services is a… 1 answer below »
EXERCISE 12–2 Dropping or Retaining a Segment [LO2]
Cumberland County Senior Services is a non-profit organization devoted to providing essen- tial 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 tests ordered by their physicians. The Meals on Wheels program deliv- ers 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:
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. . . . . . . . . . . . . . . . . . . .
Fixed expenses:
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . 410,000
68,000
140,000
8,000 190,000
40,000 80,000
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 organization’s finances and considers the operating income of $5,000 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, 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 administrative overhead would be avoided if the housekeeping pro- gram were dropped, but the liability insurance and the salary of the program administrator would be avoided. Required:
1. Should the housekeeping program be discontinued? Explain. Show computations to sup- port your answer.
2. Recast the above data in a format that would be more useful to management in assessing the long-run financial viability of the various services.