Kelevant Costs for Non-Routine Decision Making 309

Esercise 8 (Dropping or Retaining a Segment)

E
Paragon Senior Services is a nonprofit organization devoted to providing
essential services to seniors who live in their own homes within the Pasig
eThree services are provided for seniors home nursing, meals on
area. ousekeeping. In the home nursing rogram, nurses visit seniors
wheels, and hou
on a regular basis to check on their general health and to perform tests
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 the past year follow:

Home Meals on House

Total Nursing Wheels keeping
Revenues P900,000 P260,000 P400,000 P240,000
Variable expenses 490,000 120,000 210.000 160.000
Contribution margin 410.000 140.000 190.000 80,000
Fixed expenses: 20,000
Depreciation 68,000 8,000 40,000 15,000
Liability insurance 42,000 20,000 7,000 37,000
Program administrators' salaries 115,000 40,000 38,000 48,000
General administrative overhead" 180,000 52.000 80,000
Total fixed expenses 405,000 120,000 165,000 120.000
Net operating income (loss) P 5.000 P20.000 P25.000 P40.000)

Allocated on the basis of program revenues.

The head administrator of Paragon Senior Services, Matsu Amamiya, is

concerned about the organization's finances 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 of previous years and are representative of what would
be expected in the future.) She feels that the organization should be building
ts financial reserves at a more rapid rate in order to prepare for the next
inevitable recession. After seeing the above report, Ms. Amamiya, 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.
Depreciation charges assume zero salvage value. None of the general
administrative overhead would be avoided if the housekeeping program were