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Houston Co. recently introduced a new inventory control system In an effort to improve its competitive position, Its management accountant assembled the following data regarding

Houston Co. recently introduced a new inventory control system In an effort to improve its competitive position, Its management accountant assembled the following data regarding the recent change:

Item

Before new system

After new system

Production cycle time

90 days

80 days

Inventory level (daily average)

$450,000

$400,000

Total sales

$2,500,000

$2,700,000

Estimated cost data, % of sales

Direct materials

40%

35%

Direct labor

20%

15%

Variable overhead

15%

15%

Fixed overhead

10%

10%

The company's inventory financing cost is estimated as 5% per year.

Required:

a) Estimate the net operating income that the company realized under the current inventory control system.

b) Estimate the net financial benefit (expressed in terms of operating income) that the company realized from the new inventory control system. c) Estimate the net financial benefit (expressed in terms of operating income) that the company realized from switching to the new inventory control system.

d) List four (4) non-financial benefits the company might expect as a result to its move to new inventory control system.

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