FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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58
**Case Study: Cost Management Decision at Loving Home Care**

**Background:**  
Due to Medicare reimbursement cuts, Loving Home Care is evaluating the feasibility of discontinuing its Certified Nursing Assistant (CNA) Division. An important consideration in this analysis is the reallocation of fixed costs from the CNA Division to the Nursing Division if the CNA Division is shut down. Below is the condensed income statement for the year ended December 31.

**Loving Home Care: Condensed Income Statement for the Year Ended December 31**

| Division | Nursing | CNA | Total |
|----------|---------|-----|-------|
| **Sales** | $3,500,000 | $1,000,000 | $4,500,000 |
| **Cost of Goods Sold:** |  |  |  |
| Variable Costs | $2,000,000 | $700,000 | $2,700,000 |
| Fixed Costs | $400,000 | $400,000 | $800,000 |
| **Total Cost of Goods Sold** | $2,400,000 | $1,100,000 | $3,500,000 |
| **Income (Loss) from Operations** | $1,100,000 | -$100,000 | $1,000,000 |

**Graph/Diagram Explanation:**  
There is no graph or diagram in the provided image, but the income statement table should be clearly explained as it contains key financials for analysis.

**Key Points to Consider:**
1. **Sales Distribution:** The Nursing Division generates $3,500,000 in sales, while the CNA Division accounts for $1,000,000. 
2. **Variable Costs:** The Nursing Division has variable costs of $2,000,000, and the CNA Division incurs $700,000 in variable costs.
3. **Fixed Costs:** Both divisions incur the same amount of fixed costs, i.e., $400,000 each.
4. **Total Cost of Goods Sold:** The Nursing Division has a total cost of goods sold (COGS) amounting to $2,400,000, while the CNA Division has a COGS of $1,100,000.
5. **Income (Loss) from Operations:** The Nursing Division shows a positive income from operations of $1,100,000, whereas the CNA Division operates at a loss of $100,000.

**Recommendation:**  
When evaluating the continuation or discontinuation
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Transcribed Image Text:**Case Study: Cost Management Decision at Loving Home Care** **Background:** Due to Medicare reimbursement cuts, Loving Home Care is evaluating the feasibility of discontinuing its Certified Nursing Assistant (CNA) Division. An important consideration in this analysis is the reallocation of fixed costs from the CNA Division to the Nursing Division if the CNA Division is shut down. Below is the condensed income statement for the year ended December 31. **Loving Home Care: Condensed Income Statement for the Year Ended December 31** | Division | Nursing | CNA | Total | |----------|---------|-----|-------| | **Sales** | $3,500,000 | $1,000,000 | $4,500,000 | | **Cost of Goods Sold:** | | | | | Variable Costs | $2,000,000 | $700,000 | $2,700,000 | | Fixed Costs | $400,000 | $400,000 | $800,000 | | **Total Cost of Goods Sold** | $2,400,000 | $1,100,000 | $3,500,000 | | **Income (Loss) from Operations** | $1,100,000 | -$100,000 | $1,000,000 | **Graph/Diagram Explanation:** There is no graph or diagram in the provided image, but the income statement table should be clearly explained as it contains key financials for analysis. **Key Points to Consider:** 1. **Sales Distribution:** The Nursing Division generates $3,500,000 in sales, while the CNA Division accounts for $1,000,000. 2. **Variable Costs:** The Nursing Division has variable costs of $2,000,000, and the CNA Division incurs $700,000 in variable costs. 3. **Fixed Costs:** Both divisions incur the same amount of fixed costs, i.e., $400,000 each. 4. **Total Cost of Goods Sold:** The Nursing Division has a total cost of goods sold (COGS) amounting to $2,400,000, while the CNA Division has a COGS of $1,100,000. 5. **Income (Loss) from Operations:** The Nursing Division shows a positive income from operations of $1,100,000, whereas the CNA Division operates at a loss of $100,000. **Recommendation:** When evaluating the continuation or discontinuation
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