Question


Charlton Associates prepares architectural drawings to conform to local structural- safety codes. Its income statement for 2013 is as follows:
Revenues ....................... $ 731,850
Salaries of professional staff (8,200 hours * $ 47 per hour)...... 385,400
Travel ......................... 21,000
Administrative and support costs ................ 154,160
Total costs........................ 560,560
Operating income...................... $ 171,290

Following is the percentage of time spent by professional staff on various activities:
Making calculations and preparing drawings for clients...... 75%
Checking calculations and drawings................ 4
Correcting errors found in drawings (not billed to clients) ...... 7
Making changes in response to client requests (billed to clients) .... 6
Correcting own errors regarding building codes (not billed to clients)... 8
Total........................... 100%
Assume administrative and support costs vary with professional- labor costs. 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 Charlton 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 Charlton 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 Charlton’s operating income for 2013.
4. Now suppose Charlton could take on as much business as it could complete, but it could not add more professional staff. Assume Charlton could eliminate all errors so that it does not need to spend any time correcting errors. Assume Charlton could use the time saved to increase revenues proportionately. Assume travel costs will remain at $ 21,000. Calculate Charlton’s operating income for 2013.



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  • CreatedJanuary 15, 2015
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