Question

Q 6.3: Hanson Technology is a computer manufacturer. For years, Hanson has relied on the JIT inventory method. However, due to numerous recent stockouts by Hanson’s suppliers, Hanson’s management has decided to transition to the traditional inventory method. How will Hanson’s inventory levels change as a result of this switch?

• A: Hanson’s levels of finished goods and raw materials will all decrease but work in process will remain the same.

• B: Hanson’s levels of finished goods, work in process, and raw materials will all decrease.

• C: Hanson’s levels of finished goods, work in process, and raw materials will all increase.

• D: Hanson’s level of finished goods will increase but raw materials and work in process will remain the same.

Answer 1

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Answer: C: Hanson’s levels of finished goods, work in process, and raw materials will all increase.

Explanation:

While following the Just-in-time approach, the manufacturer does not maintain any significant level of inventory of raw material and work-in-process. Raw materials are acquired from the supplier once an order is received for finished goods. When a transition is made to a traditional approach, the manufacturer will be required to maintain stocks of raw materials and WIP and can also produce finished goods from stock available inhouse. Hence, Levels of finished goods, work-in-process, and raw material will increase.