Week 9 Class Exercise Solutions - PROBLEM 1219 Dropping or...

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Intermediate Algebra
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Chapter 1 / Exercise 63
Intermediate Algebra
Tussy/Gustafson
Expert Verified
PROBLEM 12–19 Dropping or Retaining a Segment 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 seniors—home nursing, Meals On Wheels, and housekeeping. Data on revenue and expenses for the past year follow: The head administrator of Jackson County Senior Services, Judith Miyama, is concerned about the organization’s finances and considers the net 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, Ms. Miyama asked for more information about the financial advisability of perhaps 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. Should the Housekeeping program be discontinued? Explain. Show computations to support 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.
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Intermediate Algebra
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Chapter 1 / Exercise 63
Intermediate Algebra
Tussy/Gustafson
Expert Verified
Solutions: 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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