Impact of JIT on inventory costs (10 marks) ACCA Financial Information for Management CDE has recently won a contract to supply a component to a major car manufacturer that is about to launch a new range of vehicles. This is a great success for the design team of CDE as the component has many unique features and will be an important feature of some of the vehicles in the range.

CDE is currently building a specialized factory to produce the component. The factory will start production on 1 January. There is an expected demand for 140000 units of the component.
Forecast sales and production costs are:

Fixed production overheads for the factory are expected to be $2.8 million.
A decision has to be made about the production plan. The choices are:
Plan 1: Produce at a constant rate of 35000 units per quarter Inventory would be used to cover fluctuations in quarterly demand. Inventory holding costs will be $13 per unit and will be incurred quarterly based on the average inventory held in each of the four quarters.
Plan 2: Use a just-in-time (JIT) production system The factory would be able to produce 36000 units per quarter in ‘normal’ time and up to a further 20000 units in ‘Overtime’. However, each unit produced in ‘overtime’ would incur additional costs equal to 40 per cent of the forecast variable production cost per unit for that quarter.
Required:

(a) Produce calculations using the above data to show which of the two plans would incur the lowest total cost.
(6 marks)

(b) Explain TWO reasons why the decision about the production plan should not be based on your answer to part

(a) alone.
(4 marks)
CIMA P2 Performance management

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Quarter 2 3 Sales (units) 19000 34 000 37000 50000 Variable production cost per unit 60 60 698 $ 69 69 65 70