Answer:
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.
Explanation:
1. 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.
Total Home Nursing Meals on House
Wheels -keeping
Revenues $932,000 $270,000 $409,000 $253,000
Variable expenses 478,000 119,000 203,000 156,000
Contribution margin 454,000 151,000 206,000 97,000
Traceable fixed expenses:
Depreciation 69,500 8,700 40,600 20,200
Liability insurance 44,200 21,000 7,500 15,700
Program administrators’ 115,100 40,200 38,700 36,200
salaries
Total traceable fixed 228,800 69,900 86,800 72,100
expenses
Program segment 225,200 81,100 119,200 24,900
margins
General administrative 186,400
overhead
Net operating income (loss) $38,800
2) No, 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 $(97,000)
housekeeping program is dropped
Fixed costs that can be avoided:
Liability insurance $15,700
Program administrator’s salary 36,200 51,900
Decrease in net operating income $(45,100)
for the organization as a whole
