Question: The McGowan Repair Shop repairs and services machine tools A

The McGowan Repair Shop repairs and services machine tools. A summary of its costs ( by activity) for 2012 is as follows:
a. Materials and labor for servicing machine tools...... $ 500,000
b. Rework costs.................. 150,000
c. Expediting costs caused by work delays ........ 75,000
d. Materials- handling costs .............. 50,000
e. Materials- procurement and inspection costs ...... 60,000
f. Preventive maintenance of equipment .......... 40,000
g. Breakdown maintenance of equipment ......... 75,000

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 65% is value- added and 35% is non- value- added. How much of the total of all seven costs is value- added and how much is non- value- added?
3. McGowan is considering the following changes:
(a) Introducing quality- improvement programs whose net effect will be to reduce rework and expediting costs by 60% 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 40% to reduce breakdown- maintenance costs by 50%. Calculate the effect of programs (a), ( b), and ( c) on value-added costs, non- value- added onvalue-addedcosts,non-value-added costs, and total costs. Comment briefly.

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