X Ltd manufactures and distributes three types of car (the C1, C2 and C3).
Each type of car has its own production line. The company is worried by extremely difficult market conditions and forecasts losses for the forthcoming year.
Current operations The budgeted details for next year are as follows:

Proposed JIT system Management has hired a consultant to advise them on how to reduce costs. The consultant has suggested that the company adopts a just-in-time (JIT) manufacturing system. The introduction of the JIT system would have the following impact on costs (fixed and variable):

Required:

(a) Based on the budgeted production levels, calculate the total annual savings that would be achieved by introducing the JIT system.
The following table shows the price/demand relationship for each type of car per annum.

(b) Assuming that X Ltd adopts the JIT system and that the revised variable overhead cost per car remains constant (as per the proposed JIT system budget), calculate the profit-maximizing price and output level for each type of car.
Investigations have revealed that some of the fixed costs are directly attributable to the individual production lines and could be avoided if a line is closed down for the year. The specific fixed costs for each of the production lines, expressed as a percentage of the total fixed costs, are:
C1 4%
C2 5%
C3 8%
Required:

(c) Determine the optimum production plan for the forthcoming year (based on the JIT cost structure and the prices and output levels you recommended in answer to requirement (b)).

(d) Write a report to the management of X Ltd which explains the conditions that are necessary for the successful implementation of a JIT manufacturing system.

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Direct materials Direct labour Total direct cost per car Budgeted production (cars) Number of production runs Number of orders executed Machine hours Annual overheads Set ups Materials handling Inspection C1 C2 34 2520 2924 3960 1120 1292 1980 3640 4216 5940 75 000 75 000 75 000 1000 1000 1500 4000 5000 5600 1080 000 1800000 1680 000 Fixed 000 Variable 42660 13000 per production run 52890 4000 per order executed 59880 18000 per production run Machining 144540 Distribution and warehousing 42900 40 per machine hour 3000 per order executed