JIT purchasing, relevant benefits, relevant costs. (CMA, adapted) The Margro Corporation is an automotive supplier that uses automatic turning machines to manufacture precision parts from steel bars. Margro’s inventory of raw steel averages $720,000. John Oates, president of Margro, and Helen Gorman, Margro’s controller, are concerned about the costs of carrying inventory. The steel supplier is willing to supply steel in smaller lots at no additional charge. Helen Gorman identified the following effects of adopting a JIT inven¬

tory program to virtually eliminate steel inventory:

Without scheduling any overtime, lost sales due to stockouts would increase by 35,000 units per year. However, by incurring overtime premiums of $48,000 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.

Two warehouses currently used for steel bar storage would no longer be needed. Margro rents one warehouse from another company under a cancellable leasing arrangement at an annual cost of $72,000. The other warehouse is owned by Margro and contains 12,000 square metres. Three-quarters of the space in the owned warehouse could be rented for

$1.80 per square metre per year.

Insurance and property tax costs totalling $16,800 per year would be eliminated.

Margro’s projected operating results for the 2007 calendar year follow. Long-term CHAPTER 20 capital investments by Margro are expected to produce a rate of return of 20%.

Margro Corporation Budgeted Income Statement Forthe Year Ending December31,2007 (in thousands)
Revenues (900,000 units)
Cost of goods sold:
Variable costs $4,860 Fixed costs 1,740 Total costs of goods sold:
Gross margin Marketing and distribution costs:
Variable costs $1,080 Fixed costs 1,800 Total marketing and distribution costs Operating income $12,960 6,600 6,360 2,880 $ 3,480 Required 1. Calculate the estimated dollar savings (loss) for the Margro Corporation that would result in 2007 from the adoption ofthe JIT inventory control method.
2. Identify and explain other factors that Margro should consider before deciding whether to install a JIT system.