Chapter 13 HW Solutions

Chapter 13 HW Solutions - Chapter 13 Homework Exercise...

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Chapter 13 Homework Exercise 13-2  (30 minutes) 1. No, the housekeeping program should not be discontinued. It is actually  generating a positive program segment margin and is, of course, providing a  valuable service to seniors. Computations to support this conclusion follow: Contribution margin lost if the housekeeping  program is dropped ............................................. \$(80,000) Fixed costs that can be avoided: Liability insurance ................................................ \$15,000 Program administrator’s salary ............................   37,000         52,000     Decrease in net operating income for the  organization as a whole ....................................... \$(28,000 ) Depreciation on the van is a sunk cost and the van has no salvage value since  it would be donated to another organization. The general administrative  overhead is allocated and none of it would be avoided if the program were  dropped; thus it is not relevant to the decision. The same result can be obtained with the alternative analysis below: Current  Total Total If  House- keeping Is  Dropped Difference:  Net  Operating  Income  Increase or  (Decrease) Revenues ....................................... \$900,000 \$660,000 \$(240,000) Variable expenses .........................   490,000       330,000           160,000     Contribution margin .......................   410,000       330,000           (80,000     ) Fixed expenses: Depreciation* .............................. 68,000 68,000 0 Liability insurance ....................... 42,000 27,000 15,000 Program administrators’ salaries. 115,000 78,000 37,000 General administrative overhead   180,000         180,000                               0    Total fixed expenses ......................   405,000         353,000               52,000     Net operating income (loss) ........... \$          5,000     \$(23,000 ) \$       (28,000     ) *Includes pro-rated loss on disposal of the van if it is donated to a charity.

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2. To give the administrator of the entire organization a clearer picture of the  financial viability of each of the organization’s programs, the general  administrative overhead should not be allocated. It is a common cost that  should be deducted from the total program segment margin. Following the  format introduced in Chapter 12 for a segmented income statement, a better  income statement would be: Total Home  Nursing Meals on  Wheels House- keeping 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     Traceable 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     Total traceable fixed  expenses ...........................   225,000           68,000           85,000           72,000     Program segment margins...  185,000 \$ 72,000 \$105,000 \$ 8,000 General administrative  overhead ............................   180,000     Net operating income (loss).. \$ 5,000
Exercise 13-3  (30 minutes) 1.

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