Exercise 3

The Bremer Co. manufactures cordless telephones Bremer is planning to implement a JIT production system, which requires annual tooling costs of $150,000. Bremer estimates that the following annual benefits would arise from JIT production.

a. Average inventory will decline by $700,000 from $900,000 to $200,00

b. Insurance, space, materials handling, and setup costs, which currently total $200,00 would decline by 30%

c. The emphasis on quality inherent in JIT system would reduce rework costs by 20% Bremer currently incurs $350,000 on rework.

d. Better quality would eneble Bremer to raise the prices of its products by $3 per unit. Bremer sells $30,000 unit each year.

Bremer required rate of return on inventory investment is 12% per year

Required:

1. Claculate the net benefit or cost to the Bremer Corporation From implementing a JIT production system.
2. What other nonfinancial and qualitative factors should Brmeer Consider before deciding on whether it should implement a JIT system?