=+7-17 KK Target operating profit, value-added costs, service company OBJECTIVE 3 Stratum prepares architectural drawings to conform to local structural-safety codes. Its income statement for 2014 is:

Revenues $900 000 Salaries of professional staff (8000 hours × $67.50 per hour) 400 000 Travel 18 000 Administrative and support costs 160 000 Total costs 578 000 Operating profit $182 000 Following is the percentage of time spent by professional staff on various activities:

Making calculations and preparing drawings for clients 75%

Checking calculations and drawings 4 Correcting errors found in drawings (not billed to clients) 7 Making changes in response to client requests (billed to clients) 6 Correcting own errors regarding building codes (not billed to clients) 8 Total 100%

Assume administrative and support costs vary with professional labour costs.

Consider each requirement independently.

Required 1 How much of the total costs in 2014 are value added, non-value added or in the grey area in between? Explain your answers briefly. What actions can Stratum take to reduce its costs?