The McGowan Repair Shop repairs and services machine tools. A summary of its costs ( by activity) for 2012 is as follows:

a. Materials and labor for servicing machine tools...... $ 500,000

b. Rework costs.................. 150,000

c. Expediting costs caused by work delays ........75,000

d. Materials- handling costs ..............50,000

e. Materials- procurement and inspection costs ......60,000

f. Preventive maintenance of equipment ..........40,000

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 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. McGowan is considering the following changes:

(a) Introducing quality- improvement programs whose net effect will be to reduce rework and expediting costs by 60% 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 25%; and

(c) Increasing preventive- maintenance costs by 40% to reduce breakdown- maintenance costs by 50%. Calculate the effect of programs (a), ( b), and ( c) on value-added costs, non- value- added onvalue-addedcosts,non-value-added costs, and total costs. Comment briefly.