Tagaytay Twilight Senior Services is a newly established corporation devoted to providing essential services to seniors who live in their own homes within the Tagaytay City and its neighboring areas. 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 perform test ordered by their physicians. The meals on wheels program delivers 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 2017 follow: 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 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 General administrative overhead* ............................... 180,000 52,000 80,000 48,000 Total fixed expenses ................... 405,000 120,000 165,000 120,000 Net operating income (loss) ......... 5,000 20,000 25,000 (40,000) *Allocated on the basis of program revenues. The chief operating officer of TTSS, Dr. Consuelo Mesias, a general physician, is concerned about the organization’s long-term financial prospects and considers the net operating income of P5,000 last year to be razor-thin. (Last year’s results were very similar to the results for previous year 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 sustain its operation. After seeing the above report, Dr. Mesias has sought your assistance in evaluating whether to discontinue 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: Recast the above data into the contribution margin Income Statement format that would be more useful to management in assessing the long-run financial viability of the various services. Should the housekeeping program be discontinued? Explain. Show computations to support your answer. Recommend actions to improve the company’s profitability.
Tagaytay Twilight Senior Services is a newly established corporation devoted to providing essential services to seniors who live in their own homes within the Tagaytay City and its neighboring areas. 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 perform test ordered by their physicians. The meals on wheels program delivers 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 2017 follow:
|
|
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 |
|
|
|
|
|
|
|
Fixed expenses: |
||||
|
|
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 |
|
General administrative overhead* ............................... |
180,000 |
52,000 |
80,000 |
48,000 |
|
Total fixed expenses ................... |
405,000 |
120,000 |
165,000 |
120,000 |
|
Net operating income (loss) ......... |
5,000 |
20,000 |
25,000 |
(40,000) |
|
*Allocated on the basis of program revenues. |
The chief operating officer of TTSS, Dr. Consuelo Mesias, a general physician, is concerned about the organization’s long-term financial prospects and considers the net operating income of P5,000 last year to be razor-thin. (Last year’s results were very similar to the results for previous year 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 sustain its operation. After seeing the above report, Dr. Mesias has sought your assistance in evaluating whether to discontinue 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:
- Recast the above data into the contribution margin Income Statement format that would be more useful to management in assessing the long-run financial viability of the various services.
- Should the housekeeping program be discontinued? Explain. Show computations to support your answer.
- Recommend actions to improve the company’s profitability.
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