Your manufacturing company is considering adopting JIT production. You have gathered the following annual data, which you believe are relevant to the decision. For this analysis, ignore any initial investment costs necessary to start JIT.

~ Average inventory will decline by $1,200,000, from $1,500,000 to $300,000.

™ Current inventory handling, receiving, storing, and insuring costs are 12 percent of average inventory value plus $200,000. The $200,000 will decline by $90,000 by transferring three employees to unfilled positions in another part of the company. If any of these employees leaves the company, they will not be replaced.

= Annual costs of quality should change as follows:

® Prevention (additional training, improved supplier relations)—increase by $250,000.

Inspection (employee time and testing equipment)—increase by $160,000.

© Internal failure (rework, delays)—decrease by $280,000.

= External failure (lost sales, warranty claims)—decrease by $210,000.

™ Tooling and setup costs will increase by $140,000 per year.

© Opportunity cost of capital tied up in inventory is 10 percent per year.

Required

a. What is your estimate of the net annual quantifiable cost or benefit from your company’s adopting JIT?

b. What qualitative factors should you consider before deciding this JIT issue?