Reference no: EM132509868

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:

Revenues                                                                        $731,850

Salaries of professional staff (8,200 hours x $47per 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 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%

Consider each requirement independently.

Question 1: How much of the total costs in 2013 are? value-added, non-value-added, or in the gray area in? between? Explain your answers briefly. What actions can Charlton take to reduce its?costs?

Question 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.

Question 3: Suppose Charlton 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 CharltonCharlton?'s operating income for 2013.

Question 4: CharltonCharlton could take on as much business as it could? complete, but it could not add more professional staff. Assume CharltonCharlton could eliminate all errors so that it does not need to spend any time correcting errors. Assume Charlton could use the time saved to increase revenues proportionately. Assume travel costs will remain at $21,000. Calculate Charlton's operating income for 2013.