Ben and Jerry established their business, Kiwi Component Ltd for producing motors for electric lawn mowers. Recently, they received a bid from a supplier offering to sell them rotors, an essential component of electric motors that Kiwi Component currently produces in-house. The offer is for 8,000 motors per year at $110 each. Ben and Jerry estimate the costs of producing one motor in-house as follows:

Direct Materials	$55
Direct Labour	$35
Variable Overhead Costs	$10
Fixed Overhead Costs	$70

Fixed overhead costs include both rent and depreciation on the machinery, which are considered unlikely to be change within the relevant range.

In response to the offer,Ben and Jerry commissioned a study to investigate whether any fixed overhead costs could be reduced. This study found that purchasing 8,000 rotors per year could:

• Avoid one setup cost where employees set up the metal melting for each batch of rotors produced. This would reduce total spending by $20,000.
• Allow one inspector to be laid off, saving $65,000.
• Allow one person in materials handling to be laid off, saving $35,000.
• Reduce engineering work by 50 hours at $55 per hour. However, the engineer currently allocated to the rotor production line would be re-assigned.

Ben and Jerry have asked you, a management consultant, to advise them on whether to accept the supplier's offer.

1. Reviewing the study, Kiwi Component Ltd's finance manager makes the following remark:

"This study did not take considerations into the additional activities that purchasing the rotor from the supplier would cause. For instance, inspection cost cannot be entirely saved from the entire manufacturing process. Even if we can eliminate the inspection cost on the production floor, we still need to inspect them as incoming parts in the receiving area. Conseuqently, I am doubtful that we are able to save all inspection costs."

A) Having studied the ACCY223 Activity-Based Management (ABM) topic, Ben and Jerry are interested in studying non-value-added activities in order to improve customer value. As a management consultant, please advise them onwhether inspection is a value added activity or a non-value added activity.

B)

In your opinion, provide comments on this remark and suggest two improvements on reducing inspection costs.