PART A

Farm Fresh Limited has recently decided to adopt a JIT (Just-In-Time) system inventory policy to curb its steadily rising costs and to free up cash for investment. The company anticipates that inventory will decrease from $3 600 000 to $600 000 and the freed-up funds can be invested at 8 per cent per annum. The following data applies:

Reduced inventory should produce savings in insurance and property taxes of $27 000 per annum.

The company will lease 75 per cent of its existing warehouse to another firm for $40 per square metre per year. The warehouse has 30 000 square metres.

Because there is now the need to handle an increased number of small deliveries from suppliers, Farm Fresh Limited will need to remodel its production and receiving dock for $600 000. These construction costs will be depreciated over a 10-year life.

A change in suppliers is expected to result in more expensive raw materials. However, these materials should give rise to fewer warranty and repair problems after Farm Fresh Limiteds finished products are sold, resulting in a net savings of $25 000 per year.

Two employees who are earning $60 000 each will be transferred to other positions in the company, due to the introduction of the JIT system. However, these two employees will receive a 10 per cent pay cut due to less work being required from them. A further employee who earns $75 000 per annum will be made redundant.

Reduced raw material inventory levels and accompanying stock-outs will cost the company about $70 000 per year.

Due to the adoption of JIT systems, Farm Fresh Limited will need to engage with reliable suppliers who can provide quality materials and deliver the raw materials on time. For this, the company needs to have proper and tight contracts. This will cost the company $10 000 as legal fees to have contracts with reliable suppliers.

REQUIRED:

A. Calculate and show the annual financial impact on yearly profits for Farm Fresh Limited due to the adoption of the JIT system. (10 marks)

B. Justify why the JIT is the way forward for businesses as part of their supply chain management and what risk this system may pose to businesses if not managed properly. (10 marks)