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5 The ABC Corporation is an automotive supplier that uses automatic turning machines to manufacture precision parts from steel bars. ABC's inventory of raw steel
5 The ABC Corporation is an automotive supplier that uses automatic turning machines to manufacture precision parts from steel bars. ABC's inventory of raw steel averages Rs. 6,00,000. Rau, President of ABC, and Piyush, ABC's controller, are concerned about the costs of carrying inventory. The steel suppliers is willing to supply steel in smaller lots at no additional charge. Piyush identified the following effects of adopting a JIT inventory program to virtually eliminate steel inventory. Without scheduling any overtime, lost sales due to stock outs would increase by 35,000 units per year. However, by incurring overtime premiums of Rs.40,000 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 ABC. Two warehouses currently used for steel bar storage would no longer be needed. ABC rents one warehouse from another company under a cancelable leasing arrangement at an annual cost of Rs. 60,000. The other warehouse is owned by ABC and contains 12,000 square feet. Three-fourths of the space in the owned warehouse could be rented for Rs.1.50 per square foot per year. Insurance and properly tax costs totaling Rs. 14,000 per year would be eliminated. Long-term capital investments by ABC are expected to produce an annual rate of return of 20%. ABC Corporation Budgeted income statement for the current year ending on December (in thousands) is as follows:- Particulars Revenues (9,00,000 units) Cost of goods sold F(in 000) Rs. 10,800 Variable costs Fixed costs Rs. 4,050 Rs. 1,450 Rs. 5,500 Total costs of goods sold Gross Margin Rs. 5,300 Marketing and distribution costs Variable costs Rs. 900 Fixed Costs Rs. 1,500 Total marketing and Rs. 2,400 distribution costs Required: Operating income Rs. 2,900 Calculate the estimated savings (loss) for the ABC Corporation that would result in 2003 from the adoption of the JIT inventory -control method
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