Charlton Associates prepares architectural drawings to conform to local structural-safety codes. Assume administrative and support costs vary with professional-labor costs.

Its income statement for 2013:

is as follows:

Revenues

$731,850

Salaries of professional staff (8,200 hours x

$47

per hour)

385,400

Travel

21,000

Administrative and support costs

154,160

Total costs

560,560

Operating income $171,290

Following is the percentage of time spent by professional staff on variousactivities:

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%

Consider each requirement independently.

1.

How much of the total costs in2013are value-added, non-value-added, or in the gray area in between? Explain your answers briefly. What actions canCharltontake to reduce itscosts?

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.

SupposeCharltoncould 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

CharltonCharlton's

operating income for2013.

4.

Now suppose

CharltonCharltoncould take on as much business as it could complete, but it could not add more professional staff. AssumeCharltonCharltoncould eliminate all errors so that it does not need to spend any time correcting errors. AssumeCharltoncould use the time saved to increase revenues proportionately. Assume travel costs will remain at$21,000.CalculateCharlton'soperating income for 2013.