Calvert Associates prepares architectural drawings to conform to local structural-safety codes. Its income statement for 2013 is as follows: Revenues S701,250 Salaries of professional staff (7,500 hours S52 per hour) 390,000 Travel 15,000 Administrative and support costs 171,600 Total costs 576,600 Operating income S124,650 Following is the percentage of time spent by professional staff on various activities: Making calculations and preparing drawings for clients Checking calculations and drawings Correcting errors found in drawings (not billed to clients) Making changes in response to client requests (billed to clients) • Correcting own errors regarding building codes (not billed to clients) 77% Total 100% Assume administrative and support costs vary with professional-labor costs. Consider each requirement independently. Required: 1. How much of the total costs in 2013 are value-added, non-value-added, or in the gray area between? Explain your answers briefly. What actions can Calvert 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 Calvert 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 Calvert's operating income for 2013. 4. Now suppose Calvert could take on as much business as it could complete, but it could not add more professional staff. Assume Calvert could eliminate all errors so that it does not need to spend any time correcting errors. Assume Calvert could use the time saved to increase revenues proportionately. Assume travel costs will remain at $15,000. Calculate Calvert's operating income for 2013.
Calvert Associates prepares architectural drawings to conform to local structural-safety codes. Its income statement for 2013 is as follows: Revenues S701,250 Salaries of professional staff (7,500 hours S52 per hour) 390,000 Travel 15,000 Administrative and support costs 171,600 Total costs 576,600 Operating income S124,650 Following is the percentage of time spent by professional staff on various activities: Making calculations and preparing drawings for clients Checking calculations and drawings Correcting errors found in drawings (not billed to clients) Making changes in response to client requests (billed to clients) • Correcting own errors regarding building codes (not billed to clients) 77% Total 100% Assume administrative and support costs vary with professional-labor costs. Consider each requirement independently. Required: 1. How much of the total costs in 2013 are value-added, non-value-added, or in the gray area between? Explain your answers briefly. What actions can Calvert 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 Calvert 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 Calvert's operating income for 2013. 4. Now suppose Calvert could take on as much business as it could complete, but it could not add more professional staff. Assume Calvert could eliminate all errors so that it does not need to spend any time correcting errors. Assume Calvert could use the time saved to increase revenues proportionately. Assume travel costs will remain at $15,000. Calculate Calvert's operating income for 2013.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Ex. 17, 19, 21, 22, 23 Prob. 30, 32
Calvert Associates prepares architectural drawings to conform to local structural-safety codes. Its income statement
for 2013 is as follows:
Revenues
S701,250
Salaries of professional staff (7,500 hours
S52 per hour)
390,000
Travel
15,000
Administrative and support costs
171,600
Total costs
576,600
Operating income
S124,650
Following is the percentage of time spent by professional staff on various activities:
Making calculations and preparing drawings for clients
Checking calculations and drawings
77%
3
Correcting errors found in drawings (not billed to clients)
Making changes in response to client requests (billed to clients)
• Correcting own errors regarding building codes (not billed to clients)
8
7
Total
100%
Assume administrative and support costs vary with professional-labor costs. Consider each requirement
independently.
Required:
1. How much of the total costs in 2013 are value-added, non-value-added, or in the gray area between? Explain
your answers briefly. What actions can Calvert 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 Calvert 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 Calvert's operating income for 2013.
4. Now suppose Calvert could take on as much business
staff. Assume Calvert could eliminate all errors so that it does not need to spend any time correcting errors.
Assume Calvert could use the time saved to increase revenues proportionately. Assume travel costs will remain
at $15,000. Calculate Calvert's operating income for 2013.
it could complete, but it could not add more professional
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