Europa Associates prepares architectural drawings to conform to local structural-safety codes. Its income statement for 2020 is as follows:

The percentage of time spent by professional staff on various activities follows:

Required

Assume administrative and support costs vary with professional-labor costs. Consider each requirement independently.
1. How much of the total costs in 2020 are value-added, non-value-added, or in the gray area between?
Explain your answers briefly. What actions can Europa 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 Europa 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 Europa’s operating income for 2020.
4. Now suppose Europa could take on as much business as it could complete, but it could not add more professional staff. Assume Europa could eliminate all errors so that it does not need to spend any time correcting errors. Assume Europa could use the time saved to increase revenues proportionately. Assume travel costs will remain at €15,000. Calculate Europa’s operating income for 2020.

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Revenues Salaries of professional staff (7,500 hours €52 per hour) Travel Administrative and support costs Total costs Operating income €701,250 390,000 15,000 171,600 576,600 €124,650