Carasco Associates prepares architectural drawings to conform to local structural-safety codes. Its income statement for 2007 is:
Revenues ..................................................................... $680,000
Salaries of professional staff (8,000 hours × $50 per hour) .......... 400,000
Travel ........................................................................ 18,000
Administrative and support cost ......................................... 160,000
Total costs ................................................................... 578,000
Operating income ........................................................... $102,000
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%
Required
Assume administrative and support costs vary with professional-labor costs.
Consider each requirement independently.
1. How much of the total costs in 2007 are value-added, nonvalue-added, or in the gray area in between? Explain your answers briefly. What actions can Carasco take to reduce its costs?
2. Suppose Carasco 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 Carasco's operating income.
3. Now suppose Carasco could take on as much business as it could complete, but it could not add more professional staff. Assume Carasco could eliminate all errors so that it does not need to spend any time correcting errors. Assume Carasco could use the time saved to increase revenues proportionately. Assume travel costs will remain at $18,000. Calculate Carasco's operating income?