The Margro Corporation is an automotive supplier that uses automatic turning machines to manufacture precision parts from steel bars. Margro€™s inventory of raw steel averages $600,000. John Oates, president of Margro, and Helen Gorman, Margro€™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 $40,000 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 Margro.
—† Two warehouses currently used for steel bar storage would no longer be needed. Margro rents one warehouse from another company under a cancellable leasing arrangement at an annual cost of $60,000. The other warehouse is owned by Margro and contains 12,000 square metres. Three-quarters of the space in the owned warehouse could be rented for $1.50 per square metre per year. Insurance and property tax costs totalling $14,000 per year would be eliminated.
Margro€™s required rate of return on investment is 20% per year. Margro€™s budgeted income statement for the year ending December 31, 2013 (in thousands) is as follows:
Margro Corporation Budgeted Income Statement
For the Year Ending December 31, 2013
(in thousands)

REQUIRED
1. Calculate the estimated dollar savings (loss) for the Margro Corporation that would result in 2013 from the adoption of JIT purchasing.
2. Identify and explain other factors that Margro should consider before deciding whether to adopt JIT purchasing.

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$10,800 Revenue (900,000 units) Cost of goods sold Variable costs Fixed costs S4,050 1,450 Total costs of goods sold Gross margin Marketing and distribution costs 5,500 5,300 Variable costs Fixed costs 900 1,500 Total marketing and distribution costs Operating income 2,400 2,900