ReadersNet.Com sells books and software over the Internet. A recent article in a trade journal has caught the attention of management, given that the company has experienced soaring inventory handling costs.

The article noted that similar firms have purchasing, warehousing, and distribution costs that average 13 percent of sales, which is attractive when compared against ReadersNet.Corn's results for the past year.

The following information is available:

Required:

1. What is activity-based management? What is a non-value-added activity?
2. How much did non-value-added activities cost ReadersNet.Com this past year?
3. Cite several examples of situations that may have given rise to non-value-added activities for ReadersNet.Com.
4. Will the elimination of non-value-added activities allow ReadersNet.Com to achieve a 13 percent cost percentage for each of the product lines? Show calculations.
5. Do either of the two product lines require additional cost cutting to achieve the target percentage?
If so, how much additional cost cutting is needed, and what tools (i.e., methods) might the company use to achieve the cuts? Briefly describe.

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Activity (Cost) Cost Driver Cost Driver Quantity Percent of Cost Driver Activity for Books Percent of Cost Driver Activity for Software Incoming Number of receipts purchase ($600,000) orders 2,000 70% 30% Number of Warehousing inventory ($720,000) moves 9,000 80 20 20 Outgoing shipments Number of ($450,000) shipments 15,000 25 75