Michael McKenna, manager of FarmCo's Service Division, dialed the division controller's number on his phone: "Janice, this is Mike McKenna. How's that JIT program doing? Has it saved us any money?

I've got to report to the president next week, and I'd like to know how our inventory efforts are going."

"Give me a day or two, Mike, and I'll have some figures for you," responded Janice Grady, the division controller.

FarmCo is a manufacturer of farm equipment sold by a network of distributors throughout North America. A majority of the distributors are also repair centers for FarmCo Service Division to provide timely support of spare parts. In an effort to reduce the inventory costs incurred by the Service Division, McKenna implemented a just-in-time inventory program on January 2, 20x4. JIT has now been in place for a year. Grady has been able to document the following results of JIT implementation.

• The Service Division's average inventory declined from \($1,100,000\) to \($300,000\) .

• Projected annual insurance costs of \($160,000\) declined by 60 percent due to the lower average inventory.

• A leased, 8,000-square-foot warehouse, previously used for raw-material storage, was not used at all during the year. The division paid \($22,400\) annual rent for the warehouse and was able to sublet three-quarters of the building to several tenants at \($5.00\) per square foot. The balance of the space remained idle.

• Two warehouse employees whose services were no longer needed were transferred on January 2, 20x4, to the Purchasing Department to assist in the coordination of the JIT program. The annual salary expense for these two employees totaled \($76,000\) and continued to be charged to the indirect labor portion of fixed overhead.

• Despite the use of overtime to manufacture 7,500 spare parts, lost sales due to stockouts totaled 3,800 spare parts. The overtime premium incurred amounted to \($11.20\) per part manufactured. The use of overtime to fill spare parts orders was immaterial prior to January 1 ,20x4.

Prior to the decision to implement the JIT inventory program. FarmCo's Service Division had completed its 20x4 budget. The division's budgeted income statement, without any adjustments tor just-intime inventory, follows. FarmCo's incremental borrowing rate tor inventory is 15 percent. (Ignore income taxes in this problem.)

Required:
1. Calculate the cash savings (loss) for FarmCo's Service Division that resulted during 20x4 from the adoption of the JIT inventory program.
2. Discuss any factors that should be considered before a company implements a JIT program.

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Sales (280,000 spare parts) Cost of goods sold: Variable Fixed Gross margin Selling and administrative expenses: Variable FARMCO SERVICE DIVISION Budgeted Income Statement For the Year Ended December 31, 20x4 (in thousands) Fixed Operating income Other income Income before interest and income taxes Interest expense Income before income taxes $12,320 $5,320 2,240 7,560 $4,760 $1,400 1,110 2,510 $2,250 150 $2,400 300 $2,100