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BMGT 321 Chapter 13 Homework
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13-16 Value-added, nonvalue-added costs.
The Magill Repair Shop repairs and services machine tools. A summary of its costs (by activity) for 2013 is as follows:
Required:
1. Classify each cost as value-added, non-value-added, or in the gray area between.
2. For any cost classified in the gray area, assume 60% is value-added and 40% is non-value-added. How much of the total of all seven costs is value-added and how much is non-value-added?
3. Magill is considering the following changes: (a) introducing quality-improvement programs whose net effect will*…show more content…*

Consider each requirement independently. Required: 1. How much of the total costs in 2013 are value-added, non-value-added, or in the gray area between? Explain your answers briefly. What actions can Calvert take to reduce its costs? 2. What are the consequences of misclassifying a non-value-added cost as a value-added cost? When in doubt, would you classify a cost as a value-added or non-value-added cost? Explain briefly. 3. Suppose Calvert could eliminate all errors so that it did not need to spend any time making corrections and, as a result, could proportionately reduce professional-labor costs. Calculate Calvert’s operating income for 2013. 4. Now suppose Calvert could take on as much business as it could complete, but it could not add more professional staff. Assume Calvert could eliminate all errors so that it does not need to spend any time correcting errors. Assume Calvert could use the time saved to increase revenues proportionately. Assume travel costs will remain at $15,000. Calculate Calvert’s operating income for 2013. SOLUTION 1. The classification of total costs in 2013 into value-added, nonvalue-added, or in the gray area in between follows: Value Gray Nonvalue- Total Added Area added (4) = (1) (2) (3) (1)+(2)+(3) Doing calculations and preparing drawings 77% × $390,000 $300,300 $300,300 Checking calculations and

Consider each requirement independently. Required: 1. How much of the total costs in 2013 are value-added, non-value-added, or in the gray area between? Explain your answers briefly. What actions can Calvert take to reduce its costs? 2. What are the consequences of misclassifying a non-value-added cost as a value-added cost? When in doubt, would you classify a cost as a value-added or non-value-added cost? Explain briefly. 3. Suppose Calvert could eliminate all errors so that it did not need to spend any time making corrections and, as a result, could proportionately reduce professional-labor costs. Calculate Calvert’s operating income for 2013. 4. Now suppose Calvert could take on as much business as it could complete, but it could not add more professional staff. Assume Calvert could eliminate all errors so that it does not need to spend any time correcting errors. Assume Calvert could use the time saved to increase revenues proportionately. Assume travel costs will remain at $15,000. Calculate Calvert’s operating income for 2013. SOLUTION 1. The classification of total costs in 2013 into value-added, nonvalue-added, or in the gray area in between follows: Value Gray Nonvalue- Total Added Area added (4) = (1) (2) (3) (1)+(2)+(3) Doing calculations and preparing drawings 77% × $390,000 $300,300 $300,300 Checking calculations and

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