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.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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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:

  1. 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.
  2. Should the housekeeping program be discontinued? Explain. Show computations to support your answer.
  3. Recommend actions to improve the company’s profitability.
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