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t Effect of JIT Purchasing - Relevant Cost Analysis mar Enteprises has decided to adopt JIT policy for materials. The following effects of JIT policy are identified- To implement JIT, the Company has to modify its production and material receipt facilities at a Capital Cost of 6.00,000. The new facilities will require a Cash Operating cost * 48,000 p.a.. The Capital Cost will be depreciated over 5 years. Raw Material Stockholdirag will be reduced from * 28,00,000 to 7 8,00,000. The Company can earn 15% on its long-term investments. The Company can avoid rental expenditure on storage facilities amounting to * 30,000 per annum. Property Taxes and Insurance amounting to 12,000 will be saved due to JIT programme. Presently there are 7 workers in the Stores Department at a Salary of 3,000 each per month. After implementing JIT Scheme, only 2 workers will be required in this Department. Of the balance 5 workers, 3 will be transferred to other departments, while 2 workers' employment will be terminated. Due to receipt of smaller lots of Raw Materials, there will be some disruption of production. The Costs of Stock-Out is estimated at 66,000 per annum. termine the financial impact of the JIT policy. Is it advisable for the Company to implement JIT system? Gabrsis of U policy Current Purchase Policy vs JIT Purchasing N05 Video Company sells package of blank video tapes to its customers. It purchases video tapes from Y Tape Company at 140 packet. Y Tape Company pays all freight to X Video Company. No incoming inspection is necessary because Y Tape ampany has a superb reputation for delivery of quality merchandise. Annual demand of X Video Company is 13,000 ackages. X Video Company requires 15% annual return on its investment. The Purchase Order Lead Time is 2 weeks. The chase Order is passed through internet and it costs 2 per order. The relevant insurance, material handling etc. is * 3.10 er package per year. Video Company has to decide whether or not to shift to JIT purchasing. Y Tape Company agrees to deliver 100 packages of Jeo Tapes 130 times per year (5 times every 2 weeks) instead of existing delivery system of 1,000 packages 13 times a year, ith additional amount of Re.0.02 per package. X Video Company incurs no stock out under its current purchasing policy. It is timated that X Video Company will incur stock out cost on 50 video tape packages under a JIT Purchasing Policy. In the vent of a Stock Out, X Video Company has to rush order tape packages, which costs 34 per package. Comment whether X deo Company should implement JIT purchasing system. Co. also supplies video tapes. It agrees to supply at 136 per package under JIT delivery system. If video tape is purchased m Z Co, relevant carrying cost would be * 3 per package against * 3.10 in case of purchasing from Y Tape Company. Hever Z Co does not enjoy a sterling reputation for quality. X Video Company anticipates the following negative aspects of hasing tapes from Z Co. 2,10,000 per an te: Depreciation, being apportionment of Capital Cost, is ignored in decision-making. Tax Savings on Depreciation is not considered in the above analysis. NOS Current Purchase Policy vs JIT Purchasing Video Company selis package of blank video tapes to its customers. It purchases video tapes from Y Tape Company at T 140 packet Y Tape Company pays all freight to X Video Company. No incoming inspection is necessary because Y Tape pany has a superb reputation for delivery of quality merchandise. Annual demand of X Video Company is 13,000 pages. X Video Company requires 15% annual return on its investment . The Purchase Order Lead Time is 2 weeks. The hase Order is passed through internet and it costs 32 per order. The relevant insurance, material handling etc. is * 3.10 rockage per year. Video Company has to decide whether or not to shift to JIT purchasing. Y Tape Company agrees to deliver 100 packages of leo Tapes 130 times per year (5 times every 2 weeks) instead of existing delivery system of 1,000 packages 13 times a year, hidtional amount of Re.0.02 per package. X Video Company incurs no stock out under its current purchasing policy. It is Tomated that X Video Company will incur stock out cost on 50 video tape packages under a JIT Purchasing Policy. In the ent of a Stock Out, X Video Company has to rush order tape packages, which costs * 4 per package. Comment whether X deo Company should implement JIT purchasing system. Co. also supplies video tapes. It agrees to supply at 136 per package under JIT delivery system. If video tape is purchased az Co, relevant carrying cost would be 3 per package against * 3.10 in case of purchasing from Y Tape Company. wever Z Co does not enjoy a sterling reputation for quality. X Video Company anticipates the following negative aspects of schasing tapes from Z Co