o, 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.
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 |
|
|
|
| 2-b. |
Would a segmented income statement format be more useful to management in assessing the long-run financial viability of the various services. |
|
|
|
|
|
