Problem:
1. Value-added, no value-added costs. The Marino Repair Shop repairs and services machine tools. A summary of its costs (by activity) for 2011 is as follows:
a. Materials and labor for servicing machine tools........................$800,000
b. Rework costs....................................................................75,000
c. Expediting costs caused by work delays.....................................60,000
d. Materials-handling costs......................................................50,000
e. Materials-procurement and inspection costs...............................35,000
f. Preventive maintenance of equipment.......................................15,000
g. Breakdown maintenance of equipment.....................................55,000
Required
1. Classify each cost as value-added, nonvalue-added, or in the gray area between.
2. For any cost classified in the gray area, assume 65% is value-added and 35% is nonvalue-added. How much of the total of all seven costs is value-added and how much is nonvalue-added?
3. Marino is considering the following changes: (a) introducing quality-improvement programs whose net effect will be to reduce rework and expediting costs by 75% and materials and labor costs for servicing machine tools by 5%; (b) working with suppliers to reduce materials-procurement and inspection costs by 20% and materials-handling costs by 25%; and (c) increasing preventive-maintenance costs by 50% to reduce breakdown-maintenance costs by 40%. Calculate the effect of programs (a), (b), and (c) on value-added costs, nonvalue-added costs, and total costs. Comment briefly.