Michael Miille, CFO of Miille Electrical Corp., has asked you to estimate the benefits of changing the Medics eee company’s current production process to a design based on published data from a British electrical man- (LO 4)

ufacturer. The British firm reported the following data for one of its circuit breaker assemblies.

Old British New British Miille’s Circuit Breaker Circuit Breaker Current , Production Item Process Process Process Average cost of parts and materials inventory ............. £24,300 £18,000 $110,000 eXcel Average cost of orders in PrOC€SS.........ccceeeetetettteeees £12,000 £319 $90,000 mhhe/comfiltton4e E¥olewimes Demure. caetae-cte te cheers ietabeysprraieccbined 20 hr. 35 min. 23 hr.

NumbenohemplOVeeSecnas mitztawa eeraste etek 21 16 33 PHOGUCTOMMOOmAlCarma:i treaen wieenc dkixeuatnnnstitaeee se 109 sq. m. 30 sq. m. 1,000 sq. ft.

OU SUMIMUMISIOS CAV ce eraeenca ter cde coe cedacsecnereasn 330 345 420 Value-adding cycle time percentage... 2% 63% 3%

Required

a. _ If Miille copied the British firm’s approach to managing its processes, what percentage of improvement in each production item could it expect? What new levels of each item could Miille expect?

b. Is there a relationship between average work-in-process inventory and cycle time? Explain.

Miille Electrical has a goal to earn a 20 percent before-tax return on all its resources. In other words, a resource costing $1,000 per year should earn $200 of profit annually before taxes. Prepare a memo to Miille explaining that money tied up in inventory cannot be earning that return, so the 20 percent profit that is not earned is an opportunity cost of inventory. What is the opportunity cost of Miille’s inventory for this single product under current conditions? What is the dollar benefit of achieving reduced inventories by adopting the new production approach?