A regional distributor purchases discontinued appliances from various suppliers and then sells them on demand to retailers in the region. The distributor operates 5 days per week, 52 weeks per year. Only when it is open for business can orders be received. The following data are estimated for a counter-top mixer:

Average daily demand 1d2 = 100 mixers

Standard deviation of daily demand 1sd2 = 30 mixers

Lead time 1L2 = 3 days

Holding cost 1H2 = $9.40/unit/year

Ordering cost 1S2 = $35/order

Cycle@service level = 92 percent

The distributor uses a continuous review Q system.

a. What order quantity Q, and reorder point, R, should be used?

b. What is the total annual cost of the system?

c. If on-hand inventory is 40 units, one open order for 440 mixers is pending, and no backorders exist, should a new order be placed?

Benefits of Switching to JIT You have recently been hired as the management accountant for

Delta Technologies Inc. The company produces a broad line of subassemblies that are used in the

production of flat-screen TVs and other electronic equipment. Competitive pressures, principally

from abroad, have caused the company to reexamine its competitive strategy and associated management accounting and control systems. More to the point, the company feels a pressing need to adopt

JIT manufacturing, to improve the quality of its outputs (in response to ever-increasing demands by

consumers of electronic products), and to better manage its cost structure.

A year ago, Delta acquired, via a 5-year lease, new manufacturing equipment, the annual cost of

which is $500,000. To support the move to JIT, however, Delta would have to acquire new, computercontrolled manufacturing equipment, the leasing cost of which is estimated at $1 million per year for

4 years. If the company were to break its existing lease it would incur a one-time penalty of $275,000.

The replacement equipment is expected to provide significant decreases in variable manufacturing cost per unit, from $50 to $35. This reduction is attributed to faster setup times with the new

machine, faster processing speed, a reduction in direct material waste, and a reduction in direct labor

expenses (because of increased automation). In addition, improvements in manufacturing cycle time

and improvements in product quality are expected to increase annual sales (in units) by approximately 25% (based on a current volume of 40,000 units).

Additional financial information regarding each decision alternative (existing equipment versus

replacement equipment) is as follows:

 

Problems

Item Pre-JIT Post-JIT

Selling cost per unit $ 5.00 $ 5.00

Average per-unit cost of Direct Materials Inventory 15.00 12.00

Average per-unit cost of WIP Inventory 25.00 20.00

Average per-unit cost of Finished Goods Inventory 40.00 30.00

Selling price per unit 70.00 70.00

Final PDF to printer

blo17029_ch17_713-774.indd 766 02/19/18 09:10 AM

766 Part Three Operational-Level Control

The increased automation, including computer-based manufacturing controls, associated with

the replacement equipment will greatly reduce the need for inventory holdings. The annual inventory holding cost, based on the company's (after-tax) weighted-average cost of capital, is 10%.

Based on engineering estimates provided to Delta by the lessor company, all inventory holdings

(direct materials, WIP, and finished goods) can safely be cut in half from current levels. Currently,

Delta holds, on average, 4 months of raw materials inventory, 3 months of WIP inventory, and 2

months of finished goods inventoryall of which are based on production requirements.

Required

M9M

1. Essentially, how is a JIT manufacturing system different from a conventional system?

2. What is an appropriate role for management accounting regarding a company's adoption of a JIT manufacturing system?

3. Based on the information presented above, determine the annual financial benefit (including reduction

in inventory carrying costs) associated with the proposed move by the company to JIT. (Round your

final answer to the nearest whole dollar.)

4. What is the projected first-year net financial effect of investing in the new equipment in conjunction

with a move to JIT? Based on an analysis of financial considerations alone, should the company make

the switch to JIT? Why or why not?

5. What additional considerations (both qualitative and quantitative) might bear on the decision at hand?