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Homework answers / question archive / As part of its commitment to quality, the J
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 After Situation Adopting ]IT
Manufacturing costs as percentage of sales: Product-level support 13% 6% Variable manufacturing overhead 28 13 Direct materials 30 20 Direct manufacturing labor 21 14
Other financial data: Sales revenue Inventory of WIP
Other data: Manufacturing cycle time Inventory financing costs (per annum)
$ 1,395,000 225,000
$ 1,740,000 39,000
60 days 30 days 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?
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Less. Costs
Operating profit
| Current situation | After JIT | Change | |
| Sales | $1,395,000 | $1,740,000 | $345,000 |
| Less: Costs | |||
| Production Level Support (13% of $1,395,000; 6% of $1,740,000) | $181,350 | $104,400 | ($76,950) |
| Variable Manufacturing Overhead (28% of $1,395,000; 13% of $1,740,000) | $390,600 | 226,200 | ($164,400) |
| Direct Material (30% of $1,395,000; 20% of $1,740,000) | $418,500 | $348,000 | ($70,500) |
| Direct Manufacturing Labor (21% of $1,395,000; 14% of $1,740,000) | $292,950 | $243,600 | ($49,350) |
| Inventory Financing Costs (225,000*10%; 39,000*10%) | $22,500 | $3,900 | ($18,600) |
| Total Costs | $1,305,900 | $926,100 | ($379,800) |
| Operating Profits | $89,100 | $813,900 | $724,800 |
