Advanced: Calculation of reduction in storage costs arising from the implementation of JIT production and purchasing Prodco pic has an annual turnover of £30 000000 from a range of products. Material costs and conversion costs account for 30% and 25% of turnover respectively.

Other information relating to the company is as follows:

(i) Stock values are currently at a constant level, being:

(a) Raw material stock: 10% of the material element of annual turnover.

(b) Work in progress: 15% of the material element of annual turnover together with a proportionate element of conversion costs allowing for 60% completion of work in progress as to conversion costs and 100% completion as to material cost. The material cost: conversion cost ratio is constant for all products.

(c) Finished goods stock: 12% of the mat¬ erial element of annual turnover together with a proportionate element of conver¬ sion cost.

(ii) Holding and acquisition costs of materials comprise fixed costs of £100000 per annum plus variable costs of £0.10 per £ of stock held.

(iii) Movement and control costs of work in progress comprise fixed costs of £140 000 per annum plus variable costs of £0.05 per £ of material value of work in progress.

(iv) Holding and control costs of finished goods comprise fixed costs of £180000 per annum plus variable costs of £0.02 per £ of finished goods (material cost + conversion cost).

(v) Financial charges due to the impact of stock holding on working capital requirement are incurred at 20% per annum on the value of stocks held.

Prodco pic are considering a number of changes which it is estimated will affect stock levels and costs as follows:

1. Raw material stock: Negotiate delivery from suppliers on a just-in-time basis. Stock levels will be reduced to 20% of the present level. Fixed costs of holding and acquiring stock will be reduced to 20% of the present level and variable costs to £0.07 per £ of stock held.
2. Work in progress: Convert the layout of the production area into a ‘dedicated cell’ format for each product type instead of the existing system which comprises groups of similar machines to which each product type must be taken. Work in progress volume will be reduced to 20% of the present level with the same stage of completion as at present. Fixed costs of movement and control will be reduced to 40% of the present level and variable costs to £0.03 per £ of material value of work in progress.
3. Finished goods stock: Improved control of the flow of each product type from the production area will enable stocks to be reduced to 25% of the present level. Fixed costs of holding and control will be reduced to 40% of the present level and variable costs to £0.01 per £ of finished goods held.
Required:

(a) Calculate the annual estimated financial savings from the proposed changes in each of raw material stock, work in progress and finished goods stock. (12 marks)

(b) Suggest reasons for the reductions in the costs associated with each of raw material stock, work in progress and finished goods stock which it is estimated will occur if the proposed changes are implemented.
(6 marks)

(c) Discuss additional costs and benefits which may result from the proposed changes about which information should be obtained before implementation of the changes takes place.