=+A10-7 Winter Comfort Inc. manufactures electric space heaters. While the CEO, Kevin Cross, is visitJust-in-time principles ing the production facility, the following conversation takes place with the plant manager, Alicia Alvarez:

Kevin: As I walk around the facility, I can’t help noticing all the materials inventories. What’s going on?

Alicia: I have found our suppliers to be very unreliable in meeting their delivery commitments.

Ihus, I keep a lot ofmaterials on hand so as to not risk running out and shutting down production.

Kevin: Not only do I see a lot ofmaterials inventory, but there also seems to be a lot offinished goods inventory on hand. Why is this?

Alicia: As you know, I am evaluated on maintaining a low cost per unit. The one way that I am able to reduce my unit costs is by producing as many space heaters as possible. This allows me t0 spread my fixed costs over a larger base. When orders are down, the excess produc¬

tion builds up as inventory, as we are seeing now. But don’t worry—I’m really keeping our costs down this way.

Kevin: I’m not so sure. It seems that this inventory must cost us something.

Alicia: Not really. I’ll eventually use the materials and we’ll eventually sell the finished goods.