Chanaka Associates prepares architectural drawings to conform to local structural-safety codes.

Assume administrative and support costs vary with professional-labor costs. Consider each requirement independently.

Its income statement for 2017 is as follows:

Revenues			$722,400
Salaries of professional staff	(8,000 hours x $50 per hour)		400,000
Travel			19,000
Administrative and support costs			160,000
Total costs			579,000
Operating income			$143,400

The percentage of time spent by professional staff on various activities follows:

Making calculations and preparing drawings for clients	78	%
Checking calculations and drawings	3
Correcting errors found in drawings (not billed to clients)	6
Making changes in response to client requests (billed to clients)	5
Correcting own errors regarding building codes (not billed to clients)	8
Total	100	%

1.	How much of the total costs in 2017 are value-added, non-value-added, or in the gray area between? Explain your answers briefly. What actions can Chanaka take to reduce its costs?
2.	What are the consequences of misclassifying a non-value-added cost as a value-added cost? When in doubt, would you classify a cost as a value-added or non-value-added cost? Explain briefly.
3.	Suppose Chanaka could eliminate all errors so that it did not need to spend any time making corrections and, as a result, could proportionately reduce professional-labor costs. Calculate Chanaka's operating income for 2017.
4.	Now suppose Chanaka could take on as much business as it could complete, but it could not add more professional staff. Assume Chanaka could eliminate all errors so that it does not need to spend any time correcting errors. Assume Chanaka could use the time saved to increase revenues proportionately. Assume travel costs will remain at $19,000. Calculate Chanaka's operating income for 2017.