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 be to reduce rework and expediting costs by 40% 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 30%; and (c) increasing preventive-maintenance costs by 70% to reduce breakdown-maintenance costs by 50%. Calculate the effect of programs (a), (b), and (c) on value-added costs, non-value-added costs, and total costs. Comment briefly.
3. Effect on Costs Classified as

Program Value-Added Nonvalue-Added Gray
Area
(a) Quality improvement programs to
• reduce rework costs by 40% (0.40  $90,000)
• reduce expediting costs by 40% (0.40  $65,000)
• reduce materials and labor costs by 5% (0.05  $1,100,000)
Total effect

–$ 55,000
–$ 55,000
–$ 36,000

– 26,000

–$ 62,000

(b) Working with suppliers to
• reduce materials procurement and inspection costs by 20% (0.20  $45,000)
• reduce materials handling costs by 30% (0.30  $80,000)
Total effect
Transferring 60% of gray area costs (0.60  $33,000 = $19,800) as value-added and 40%