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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.

  1. 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

  1. 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

  1. 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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