Carson Associates prepares architectural drawings to conform to local structural-safety codes. Its statement of comprehensive income for 2015 is:

Revenue ..................................................................................... $680,000

Salaries of professional staff (8,000 hours × $50 per hour) ........................... 400,000

Travel .......................................................................................... 18,000

Administrative and support costs ......................................................... 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 %

Assume administrative and support costs vary with professional-labour costs.

Required

Consider each requirement independently.

1. How much of the total costs in 2015 are value-added, non-value-added, or in the grey area in between?

Explain your answers briefly. What actions can Carson take to reduce its costs?

2. Suppose Carson could eliminate all errors so that it did not need to spend any time making corrections and, as a result, could proportionately reduce professional-labour costs. Calculate Carson's operating income for 2015.

3. Now suppose Carson could take on as much business as it could complete, but it could not add more professional staff. Assume Carson could eliminate all errors so that it does not need to spend any time correcting errors. Assume Carson could use the time saved to increase revenue proportionately. Assume travel costs will remain at $18,000. Calculate Carson's operating income for 2015.