Question
M Ltd manufactures and distributes three types of cars (the T101, T102 and T103). Each type of car has its own production line. Due to
M Ltd manufactures and distributes three types of cars (the T101, T102 and T103). Each type of car has its own production line. Due to COVID 19 situation, the company is currently facing extremely difficult market conditions and forecasts losses for the forthcoming year. Management has decided to implement Just-In-Time and hired a consultant to advise them on how to reduce costs. The accountant of the company and the consultant have provided following data.
- The budget details for next year:
| T101 | T102 | T103 |
$ | $ | $ | |
Direct materials (per unit) | 2520 | 2924 | 3960 |
Direct labour (per unit) | 1000 | 1200 | 1900 |
Total direct cost (per unit) | 3640 | 4216 | 5940 |
| Numbers | ||
Budgeted production (cars) | 75000 | 75000 | 75000 |
Number of production runs | 1500 | 1000 | 1500 |
Number of orders executed | 2000 | 4000 | 4000 |
Machine hours | 1000000 | 1800000 | 1700000 |
- Annual overhead costs
| Fixed | Variable |
$000 | $ | |
Set ups | 39,000 | 12000 per production run |
Materials handling | 52000 | 4000 per order executed |
Inspection of production run | 54,000 | 18000 per production run |
Machining | 14000 | 40 per machine hour |
Distribution and warehousing | 12000 |
- Impact on following costs, if JIT manufacturing system is adopted
Variable costs |
|
Direct labour | Increase by 20% |
Set ups | Decrease by 30% |
Materials handling | Decrease by 30% |
Inspection | Decrease by 30% |
Machining | Decrease by 15% |
Fixed costs |
|
Distribution and warehousing | Fully eliminated |
Question: Based on the budgeted production levels, calculate the total annual savings that would be achieved by introducing the JIT system.
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