Carey Manufacturing, Inc., is considering reorganizing its plant into manufacturing cells. The following estimates have been prepared to evaluate the benefits from the reorganization:

Before the change After the change

Total annual sales$700,000$850,000

Costs as percentage of sales:

Direct materials10%9%

Direct labor6%4%

Support costs9%7%

Work-in-process inventory$200,000$120,000

Inventory carrying costs are estimated to be 12% per year.

Required:

a.Why do the layout reorganization estimates include

1. a decrease in work-in-process inventory?

2. a decrease in direct material costs as a percentage of sales?

3. an increase in sales?

b.As a result of the layout reorganization, what amount of annual change is projected

1. from carrying reduced levels of work-in-process inventory?

2. for incremental manufacturing costs?

3. in total benefits?

1