Nursing home revenue review

Jackson County Senior Services is a nonprofit organization devoted to providing essential services to seniors who live in their own homes within the Jackson County area. 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 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:

Total

Home Nursing

Meals On Wheels

House
keeping

Revenues
$
926,000
$
267,000
$
406,000
$
253,000

Variable expenses

471,000

113,000

199,000

159,000

Contribution margin

455,000

154,000

207,000

94,000

Fixed expenses:

Depreciation

69,000

8,300

40,600

20,100

Liability insurance

43,900

20,800

7,600

15,500

Program administrators’ salaries

115,300

40,900

38,300

36,100

General administrative overhead*

185,200

53,400

81,200

50,600

Total fixed expenses

413,400

123,400

167,700

122,300

Net operating income (loss)
$
41,600
$
30,600
$
39,300
$
-28,300

*Allocated on the basis of program revenues.

The head administrator of Jackson County Senior Services, Judith Miyama, is concerned about the organization’s finances and considers the net operating income of $41,600 last year to be too small. (Last year’s results were very similar to the results for previous years 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 prepare for the next inevitable recession. After seeing the above report, Ms. Miyama asked for more information about the financial advisability of 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 dropped, but the liability insurance and the salary of the program administrator would be avoided.

Required:

1a.
What is the impact on net operating income by discontinuing housekeeping program? (Input the amount as a positive value. Omit the “$” sign in your response.)

(Click to select)IncreaseDecrease in net operating income by
$

1b.
Should the housekeeping program be discontinued?

Yes

No

2
Would a segmented income statement format be more useful to management in assessing the long-run financial viability of the various services.

Yes

No

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2.
value:
17.00 points

Climate-Control, Inc., manufactures a variety of heating and air-conditioning units. The company is currently manufacturing all of its own component parts. An outside supplier has offered to sell a thermostat to Climate-Control for $33 per unit. To evaluate this offer, Climate-Control, Inc., has gathered the following information relating to its own cost of producing the thermostat internally:

Per Unit

15,800 Units
per year

Direct materials
$
9
$
142,200

Direct labor

173,800

Variable manufacturing overhead

15,800

Fixed manufacturing overhead, traceable

142,200

Fixed manufacturing overhead, common, but allocated

205,400

Total cost
$
43
$
679,400

*40% supervisory salaries; 60% depreciation of special equipment (no resale value).

Required:

1a.
Assuming that the company has no alternative use for the facilities now being used to produce the thermostat, compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to two decimals and your final answers to the nearest dollar amount.Omit the “$” sign in your response.)

Make
Buy

Total relevant cost (15,800 units)
$
$

1b.
Should the outside supplier’s offer be accepted?

Accept

Reject

2a.
Suppose that if the thermostats were purchased, Climate-Control, Inc., could use the freed capacity to launch a new product. The segment margin of the new product would be $150,720 per year. Compute the total cost of making and buying the parts. (Round your Fixed manufacturing overhead per unit rate to two decimals and your final answers to the nearest dollar amount. Omit the “$” sign in your response.)

Make
Buy

Total relevant cost (15,800 units)
$
$

2b.
Should Climate-Control, Inc., accept the offer to buy the thermostats from the outside supplier for $33 each?

Reject

Accept

3.
value:
17.00 points

Miyamoto Jewelers is considering a special order for 22 handcrafted gold bracelets to be given as gifts to members of a wedding party. The normal selling price of a gold bracelet is $407 and its unit product cost is $269 as shown below:

Direct materials
$
143

Direct labor

Manufacturing overhead

Unit product cost
$
269

Most of the manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced in any given period. However, $6 of the overhead is variable with respect to the number of bracelets produced. The customer who is interested in the special bracelet order would like special filigree applied to the bracelets. This filigree would require additional materials costing $5 per bracelet and would also require acquisition of a special tool costing $465 that would have no other use once the special order is completed. This order would have no effect on the company’s regular sales and the order could be fulfilled using the company’s existing capacity without affecting any other order.

Required:

a.
What effect would accepting this order have on the company’s net operating income if a special price of $367 is offered per bracelet for this order? (Input the amount as a positive value. Omit the “$” sign in your response.)

Net operating income (Click to select)increaseddecreased by
$

b.
Should the special order be accepted at this price?

No

Yes

4.
value:
17.00 points

Sport Luggage Inc. makes high-end hard-sided luggage for sports equipment. Data concerning three of the company’s most popular models appear below.

Ski
Vault

Golf
Caddy

Fishing
Quiver

Selling price per unit
$
250

$
320

$
215

Variable cost per unit
$
110

$
210

$
155

Plastic injection molding machine processing time required to produce one unit
14 minutes
13 minutes
11 minutes

Pounds of plastic pellets per unit
9 pounds
10 pounds
14 pounds

Required:

1a.
The total time available on the plastic injection molding machine is the constraint in the production process. What is contribution margin per unit of the constrained resources for Ski Vault, Golf Caddy and Fishing Quiver? (Round your answers to 2 decimal places. Omit the “$” sign in your response.)

Ski Vault
Golf Caddy
Fishing Quiver

Contribution margin
$
per minute
$
per minute
$
per minute

1b.
Which product would be the most profitable use of this constraint?