Tennessee Company needs an average of eight weeks' lead time to produce and ship an order. Customers are willing to wait only five weeks for orders to be shipped, so presently all orders are filled from finished goods inventory. The annual carrying cost of inventory is 20% of the cost of the inventory. Average inventories are as follows:
Materials ................................... $3,000,000
Work in process .......................... 5,000,000
Finished goods ........................... 7,000,000
Management is determined to double the velocities of all tasks from ordering materials to issuing materials to production and all tasks from the receipt of a customer order to shipment of the order. There will be no change in the total annual output of finished work, and because presently most flaws in processing are discovered promptly, no reduction in the cost of defects is expected.
Required:
Using only the information given, calculate the annual savings expected.