Question

As part of its commitment to quality, the J. J. Borden manufacturing company is proposing to introduce just-in-time (JIT) production methods. Managers of the company have an intuitive feel regarding the financial benefits associated with a change to JIT, but they would like to have some data to inform their decision making in this regard. You are provided with the following data:

Item	Existing Situation				After Adopting JIT
Manufacturing costs as percentage of sales:
Product-level support		14	%			5	%
Variable manufacturing overhead		28				11
Direct materials		30				20
Direct manufacturing labor		20				13
Other financial data:
Sales revenue	$	1,450,000			$	1,850,000
Inventory of WIP		280,000				50,000
Other data:
Manufacturing cycle time		60	days			30	days
Inventory financing costs (per annum)		10	%			10	%

Required:

As the management accountant for the company, prepare an estimate the financial benefits associated with the adoption of JIT. Specifically, what is the estimated change in annual operating income attributable to the JIT implementation?

Answer 1

Answer :-

	Current situation	After JIT	Change
sales	$1,450,000	$1,850,000	-$400,000
less: costs
production level support	$203,000	$92,500	$110,500
variable manufacturing overhead	$406,000	203,500	$202,500
direct material	$435,000	$370,000	$65,000
direct manufacturing labor	$290,000	$240,500	$49,500
inventory financing costs	$28,000	$5,000	$23,000
total costs	$1,362,000	$911,500	$450,500
Operating profits	$88,000	$938,500	$850,500