Cost Impact Of Just-in-Time Inventory System. Margro Corporation is an automotive supplier that uses auto¬ matic machines to manufacture precision parts from steel bars. Margro’s inventory of raw steel averages $600,000, with a turnover rate of four times per year.

John Oates, president of Margro, is concerned about the costs of carrying inventoiy. He is considering the adoption of the just-in-time inventory system in order to eliminate the need to carry any raw steel inventory. Oates has asked Helen Gorman, Margro’s controller, to evaluate the feasibility of just-in-time for the corpora¬ tion. Gorman identified the following effects of adopting just-in-time.

(a) Without scheduling any overtime, lost sales due to stockouts would increase by 35,000 units per year. However, by incurring overtime premiums of $40,000 per year, the increase in lost sales could be reduced to 20,000 units. This would be the maximum amount of overtime that would be feasible for Margro.

(b) Two warehouses presently used for steel bar storage would no longer be needed. Margro rents one ware¬ house from another company at an annual cost of $60,000. The other warehouse is owned by Margro and contains 12,000 square feet. Three-fourths of the space in the owned warehouse could be rented for $1.50 per square foot per year.

(c) Insurance and property tax costs totaling $14,000 per year would be eliminated.

Margro’s projected operating results for the current calendar year are as follows: LO7 Margro Corporation Pro Forma Income Statement for the Year Ending December 31 (in Thousands of Dollars)

Sales (900,000units).

Cost of goods sold:

Variable.

Fixed.

Grossprofit.

Marketing and administrative expenses:

Variable...

Fixed.

Income before interest and incometax.

Interest.

Income before incometax.

Incometax.

Netincome.

$4,050 1,450

$ 900 1,500

$10,800 5,500 $ 5,300 2,400

$ 2,900 900

$ 2,000 800

$ 1,200 Long-term capital investments by Margro are expected to produce a rate of return of 12% after income tax. Margro is subject to an effective income tax rate of 40%.

Required:
(1) Calculate the estimated before-tax dollar savings (loss) for Margro Corporation that would result in the current year from the adoption of the just-in-time inventory system.
(2) Identify and explain the conditions that should exist in order for a company to successfully install just-in-
time.