Bradshaw Repair Shop repairs and services machine tools.

A summary of its costs (by activity) for 2014 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. Bradshaw 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%; and

(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.