The Magill Repair Shop repairs and services machine tools. A summary of its costs (by activity) for 2013 is as follows:

a. Materials and labor for servicing machine tools ......$ 1,100,000

b. Rework costs .................... 90,000

c. Expediting costs caused by work delays ........... 65,000

d. Materials-handling costs ................. 80,000

e. Materials-procurement and inspection costs ........ 45,000

f. Preventive maintenance of equipment ................. 55,000

g. Breakdown maintenance of equipment .................. 75,000

Required

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 60% is value-added and 40% is non-value-added. How much of the total of all seven costs is value-added and how much is non-value-added?

3. Magill is considering the following changes:

(a) introducing quality-improvement programs whose net effect will be to reduce rework and expediting costs by 40% 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 30%;

(c) increasing preventive-maintenance costs by 70% to reduce breakdown-maintenance costs by 50%. Calculate the effect of programs (a), (b), and (c) on value-added costs, non- value- added costs, and total costs. Comment briefly.