The Marino Repair Shop repairs and services machine tools. A summary of its costs (by activity) for 2012 is as follows:
a. Materials and labour for servicing machine tools ..................... $800,000
b. Rework costs ............................................................... 75,000
c. Expediting costs caused by work delays ................................ 60,000
d. Materials-handling costs .................................................. 50,000
e. Materials-procurement and inspection costs ........................... 35,000
f. Preventive maintenance of equipment .................................. 15,000
g. Breakdown maintenance of equipment ................................. 55,000
Required
1. Classify each cost as value-added, non-value-added, or in the grey area in between.
2. For any cost classified in the grey 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. Marino is considering the following changes:
(a) Introducing quality-improvement programs whose net effect will be to reduce rework and expediting costs by 75% and materials and labour 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%;
(c) Increasing preventive-maintenance costs by 50% to reduce breakdown- maintenance costs by 40%. Calculate the effect of programs (a), (b), and (c) on value- added costs, non-value-added costs, and total costs. Comment briefly.