AutoTech, Inc. is an automotive supplier that uses automatic screw machines to manufacture precision parts from steel bars. AutoTech's inventory of raw steel averages \($1,800,000\) with a turnover rate of four times per year. John Mercedes, president of AutoTech, is concerned about the costs of carrying inventory.

He is considering the adoption of just-in-time inventory procedures in order to eliminate the need to carry any raw steel inventory. Mercedes has asked Katrina Gorman, AutoTech's controller, to evaluate the feasibility of JIT for the corporation. Gorman has identified the following effects of adopting JIT.

• Without scheduling any overtime, lost sales due to stockouts would increase by 35,000 units per year. However, by incurring overtime premiums of \($120,000\) 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 AutoTech.
• Two warehouses presently used for steel bar storage would no longer be needed. AutoTech rents one warehouse from another company at an annual cost of \($180,000\). The other warehouse is owned by AutoTech and contains 12,000 square feet. Three-fourths of the space in the owned warehouse could be rented out for \($4.50\) per square foot per year.
• Insurance totaling \($42,000\) per year would be eliminated.

AutoTech's projected operating results for 20x5 are as follows. Long-term capital investments by AutoTech are expected to produce a rate of return of 20 percent before taxes.

Required:
1. Calculate the estimated savings or loss for AutoTech, Inc. that would result in 20x5 from the adoption of just-in-time inventory methods. Ignore income taxes. (Hint: Try to estimate the costs and benefits associated with the JIT decision. Begin by computing the forgone contribution margin on the lost sales. The contribution margin is the sales revenue minus the variable cost.)
2. Identify and explain the conditions that should exist in order for a company to successfully install JIT.

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Sales (900,000 units)... Cost of goods sold: Variable... Fixed.. AUTOTECH, INC. Budgeted Income Statement For the Year Ended December 31, 20x5 (in thousands) $12,150 4,350 $32,400 16,500 Gross margin.... $15,900 Selling and administrative expenses: Variable. $ 2,700 Fixed 4,500 7,200 Income before interest and income taxes. Interest expense Income before taxes. $ 8,700 2,700 $ 6,000