Pacific Rim Enterprises' management recently decided to adopt a just-in-time inventory policy to curb steadily rising costs and free up cash for purposes of investment. The company anticipates that inventory will decrease from \($7,200,000\) to \($1,200,000\) , with the released funds to be invested at a 12 percent return for the firm. Additional data follow:

• Reduced inventories should produce savings in insurance and property taxes of \($54,000\) .

• The company will lease 75 percent of an existing warehouse to another firm for \($4\) per square foot.

The warehouse has 30,000 square feet.

• Because of the need to handle an increased number of small shipments from suppliers, Pacific Rim Enterprises will remodel production and receiving-dock facilities at a cost of \($1,200,000\) . The construction costs will be depreciated over a 10-year life.

• A shift in suppliers is expected to result in the purchase and use of more expensive raw materials.

However, these materials should give rise to fewer warranty and repair problems after Pacific Rim Enterprises' finished product is sold, resulting in a net savings of \($50,000\) .

• Three employees who currently earn \($60,000\) each will be directly affected by the just-in-time adoption decision. Two employees will be transferred to other positions with Pacific Rim Enterprises; one will be terminated.

• Reduced raw material inventory levels and accompanying stockouts will cost the firm \($140,000\) .

Required:

1. Compute the annual financial impact of the decision to adopt a just-in-time inventory system.
2. If the just-in-time system is implemented in proper fashion, what is the likelihood of excessive raw material stockouts? Briefly explain.
3. Adoption of a just-in-time purchasing system will often result in less need for the inspection of incoming materials and parts. Why?
4. In comparison with a traditional purchasing system, why does a just-in-time system give rise to an increased number of small shipments to the buying firm?