The Greene Corporation is an automotive supplier that uses automatic turning machines to manufacture precision parts from steel bars. Greene’s inventory of raw steel averages $ 300,000. John Oates, president of Greene, and Helen Gorman, Greene’s controller, are concerned about the costs of carrying inventory. The steel supplier is willing to supply steel in smaller lots at no additional charge. Gorman identifies the following effects of adopting a JIT inventory program to virtually eliminate steel inventory:

Without scheduling any overtime, lost sales due to stockouts would increase by 35,000 units per year. However, by incurring overtime premiums of $ 20,000 per year, the increase in lost sales could be reduced to 20,000 units per year. This would be the maximum amount of overtime that would be feasible for Greene.

Two warehouses currently used for steel bar storage would no longer be needed. Greene rents one warehouse from another company under a cancelable leasing arrangement at an annual cost of $ 45,000. The other warehouse is owned by Greene and contains 12,000 square feet. Three-fourths of the space in the owned warehouse could be rented for $ 1.25 per square foot per year. Insurance and property tax costs totaling $ 7,000 per year would be eliminated.

Greene’s required rate of return on investment is 20% per year. Greene’s budgeted income statement for the year ending December 31, 2014, (in thousands) is:

Required
1. Calculate the estimated dollar savings (loss) for the Greene Corporation that would result in 2014 from the adoption of JIT purchasing.
2. Identify and explain other factors that Greene should consider before deciding whether to adopt JITpurchasing.

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Revenues (900,000 units) Cost of goods sold $5,400 Variable costs Fixed costs $2,025 725 Total costs of goods sold Gross margin Marketing and distribution costs 2,750 2,650 Variable costs Fixed costs 450 750 Total marketing and distribution costs Operating income 1,200 $1,450