Question

Boris Company introduced JIT manufacturing last year and has prepared the following data to assess the benefits from the change:

Category	Before the Change	After the Change
Inventories	$220,000	$40,000
Total sales	$1,000,000	$1,500,000
Costs as percent of sales:
Direct materials	25%	20%
Direct labor	20%	15%
Support	27%	17%

  

Inventory financing costs are 12% per year.  By completing the chart below, calculate the total financial benefits that resulted from the switch to JIT manufacturing operations.

	Before Change	After Change	Difference
Sales
Direct materials
Direct labor
Support costs
Inventory carrying costs
Total profit

Answer 1

Before change After change Difference sales $1,000,000 $1,500,000 $500,000 Direct laboraterials ( $250,000 ) [ 25% * $1,000,00] ( $300,000 ) [ 20% * $1,500,000 ] ( $50,000 ) (-) Direct labor ( $200,000 ) [ 20% * $1,000,000 ] ( $225,000 ) [ 15% * $1,500,000 ( $25,000 ) (-) Support costs ( $270,000 ) [ 27% * $1,000,000 ] ( $255,000 ) [ 17% * $1,500,000 ] $15,000 (-) Inventory carrying costs ( $26,400 ) [ 12% * $220,000 ] ( $4,800 ) [ 12% * $40,000 ] $21,600 Total profit $253,600 $715,200 $461,600