Question

Question text

Just-in-Time Inventory The Dixon Manufacturing Company uses the perpetual inventory system with its raw material inventory. Dixon plans to include raw material costing $2,000,000 in the products that it manufactures. John Dixon, president of the company, wants to adopt the just-in-time manufacturing philosophy for the raw materials inventory. He wants to have only the raw material needed for the next day’s production at the end of each day. The factory operates 250 days each year. Historically, the raw materials inventory balance at the end of the day has averaged $40,000 cost. Dixon has an annual inventory carrying cost equal to 20 percent of total inventory cost.

Required

1. What is the anticipated inventory carrying cost (in dollars) if Dixon does not adopt the just-in-time manufacturing philosophy?
2. Calculate the average level (in dollars) for the raw materials inventory if Dixon adopts the just-in-time manufacturing philosophy.
3. Calculate the reductions in the raw materials inventory level and the raw materials inventory annual carrying cost if Dixon adopts the just-in-time manufacturing philosophy.

Answer 1

Ans 1)

Anticipated inventory carrying cost (in dollars) if Dixon does not adopt the just-in-time manufacturing philosophy

= $40,000 * 20%

= $8,000

Ans 2)

Average level (in dollars) for the raw materials inventory if Dixon adopts the just-in-time manufacturing philosophy

= 20% * ($2,000,000 / 250)

= $1,600

Ans 3)

Reductions in the raw materials inventory level and the raw materials inventory annual carrying cost if Dixon adopts the just-in-time manufacturing philosophy

= $8,000 - $1,600

= $6,400