2. Just-in-time inventory system. Hammer Corporation is an automotive supplier that uses automatic machines to manufacture precision parts from steel bars. The company's inventory of raw steel averages P600,000, with a turnover rate of four times per year. John Ortiz, president of the company, is concerned about the costs of carrying inventory. He is considering the adoption of the just-in-time inventory system to eliminate the need to carry any raw steel inventory. Ortiz, has asked Helen Garcia, the controller, to evaluate the feasibility of just-in-time for the corporation. Garcia identified the following effects of adopting just-in-time: a. Without scheduling any overtime, lost sales due to stockouts would increase by 35,000 units per year. However, by incurring overtime premiums of P40,000 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 the company. b. Two warehouses presently used for steel bar storage would no longer be needed. The company rents one warehouse from another company at an annual cost of P60,000. The other warehouse is owned by the company and contains 12,000 square feet, Three-fourths of the space in the owned warehouse could be rented for P1 50 per square foot per year. C. Insurance and property tax costs totaling P14,000 per year would be eliminated. The company's projected operating results for the current calendar year are as follows: Hammer Corporation Pro Forma Income Statement For The Year Ending December 31 (in thousands of pesos) Sales (900,000 units) P 10,800 Cost of goods sold: Variable P 4,050 Fixed _1.450 5.500 Gross profit 5,300 Marketing and administrative expenses: Variable 900 Fixed 1.500 2.400 Income before interest and income tax 2,900 Interest 900 Income before income tax 2,000 Income tax 800 Profit P 1200 Long-term capital investments by the company are expected to produce a rate of return of 12% after income tax. The company is subject to an effective income tax rate of 40%