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

2. 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

Required

1. Based on the budgeted production levels, calculate the total annual savings that would be achieved by introducing the JIT system.
2. Write a report to the management of X Ltd which explains the conditions that are necessary for the successful implementation of a JIT manufacturing system.