Question

Vander Belt​ Manufacturing, Inc., is considering reorganizing its plant into manufacturing cells. The following estimates have been prepared to evaluate the benefits from the​ reorganization:

	Before the change	After the change
Total annual sales	​$250,000	​$375,000
Costs as percentage of​ sales:
Direct materials	​ 20%	​ 17%
Direct labor	​ 8%	​ 7%
Manufacturing Support costs	​ 12%	​ 6%
Workminus−inminus−process inventory	​ $50,000	​ $ 40,000

Inventory carrying costs are estimated to be​ 11% per year.After the​ change,

workminus−inminus−process

inventory carrying costs are projected to decrease because​ of:

A.

the decreased need for inventory storage.

B.

lower financing costs.

C.

reduced costs in materials handling.

D.

All of the above are correct.

Answer 1

Final answer

Select - (D) All of the above are correct

Explanation

The term inventory carrying cost includes, storage cost and financing cost. A decrease in average inventory in work in process leads to decreased need for inventory storage. Financing cost lowers because it is computed on average amount of Work in process. Reduced costs in material handling ( i.e manufacturing support costs ) shall also reduce indirect costs included in computing the value of WIP.

Hence all the given scenario's leads to decrease in inventory carrying cost.