Consider the following two activities: (1) performing warranty work, cost: $60,000.The warranty cost of the most efficient competitor is $10,000.(2) Purchasing components, cost: $100,000 (5,000 purchase orders).A study reveals that the most efficient level would use 2,500 purchase orders and entail a cost of $55,000. What is the total nonvalue-added cost?
A) $55,000
B) $60,000
C) $105,000
D) $100,000

Question

Quizplus · Accepted Answer

See Text Cornerstone 5.7: Determine the value content of each activity: Is the activity nonvalue-added or value-added? Performing warranty work is nonvalue-added.Thus, the nonvalue-added cost of performing warranty work is $60,000.The cost of the competitor is also nonvalue-added and has no bearing on the analysis.Root causes for warranty work are defective products.Purchasing components is necessary so that materials are available to produce products and, thus, is value-added.However, the activity is not performed efficiently as revealed by the benchmarking study.The nonvalue-added cost is $45,000 ($100,000 - $55,000).

Consider the Following Two Activities: (1) Performing Warranty Work, Cost