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Added Value and Non-added value costs

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ReadersNet.com sells books and software over the internet. A recent article in a trade journal has caught the attention of management, given that the company has experienced soaring inventory handling costs. The article noted that similar firms have purchasing, warehousing and distribution costs that average 13 percent of sales, which is attractive when compared against ReadersNet.com's results for the past year.

Activity Cost Cost Driver Cost Driver quality % of cost driver % of cost driver
activity for books activity for software
Incoming receipts ($600,000) # of purchase orders 2,000 70% 30%
Warehousing ($720,000) # of inventory moves 9,000 80% 20%
Outgoing Shipments ($450,000) # of shipments 15,000 25% 75%

Book sales totaled $7,800,000 and software sales totaled $5,200,000. A review of the company's activities found various inefficiencies with respect to the warehousing of books and outgoing shipments of software. These inefficiencies resulted in an extra 550 moves and 250 shipments, respectively.

1. What is activity based management? What is a non-value-added activity?
2. How much did non-value-added activites cost ReaderNet.com this past year?
3. Cite several examples of situations that may have given rise to non value added activities for ReadersNet.com.
4. Will the elimination of non value added activites allow ReadersNet.com to achieve a 13 percent cost percentage for each of the product lines? Show calculations
5. Do either of the two product lines require additional cost cutting to achieve the target percentage? If so, how much additional cost cutting is needed, and what tools (methods) might the company use to achieve the cuts.

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The solution explains the valued added and non-value added costs.

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