Explore BrainMass
Share

Explore BrainMass

    Calculate cost savings using just in time inventory method (JIT)

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    SteelTech, Inc. is an automotive suplier that uses automatic screw machines to manufacture precision
    parts from steel bars. SteelTech's inventory of raw steel averages $600,000 with a turnover rate of four
    times per year. Vijay Venugopal, president of SteelTech Pvt. Ltd., is concerned about the costs of
    carrying inventory. He is considering the adoption of just-in-time inventory procedures in order to
    eliminate the need to carry any raw steel inventory. Venugopal has asked Susmita Patel, StelTech's controller,
    to evaluate the feasibility of JIT for the corporation. Gorman has identified the following effects of adopting JIT.

    * Without scheduling any overtime, lost sales due to stockouts would incrase by 35,000 units per year.
    Howevery, by incurring overtime premiums of $40,000 per year, the increase in lost sales could be
    reduced byto 20,000 units. This would be the maximum amount of overtime that would be feasible for SteelTech.

    * Two warehouses presently used for steel bar storage would no longer be needed. SteelTech rents one
    warehouse from another comany at an annual cost of $60,000. The other warehouse is owned by SteelTech
    and contains 12,000 square feet. Three-fourths of the space in the owned warehouse could be rented out
    for $1.50 per suare foot per year.

    * Insurance totaling $14,000 per year would be eliminated.

    SteelTech's projected operating results for 20x1 are as follows. Long-term capital investments by
    SteelTech are expected to produce a rate of return of 20 percent before taxes.

    STEEL TECH
    Budget Income Statement
    For the year Ended December 31, 2xxx
    (in thousands)
    Sales (900,000 units)........................................................... $10,800
    Cost of goods sold:
    Variable..........................................................$4,050
    Fixed..............................................................1,450 5,500
    Gross margn........................................................................$5,300
    Selling and administrative expenses:
    Variable............................................................$ 900
    Fixed...............................................................1,500 $2,400
    Income before interest and income taxes $2,900
    Interest expense......................................................................900
    Income before taxes................................................................$2,000

    1. Calculate the estimated savings or loss for SteelTech, that would reslt in 20x1 from the
    adoption of just in time inventory method. Ignore income taxes.

    This can be done by estimating the cost and benefits associated with the JIT decision.
    Also, by computing the forgone contribuiton margin on the lost sales. Contribuiton
    margin which is the sales revenue minus the variable cost.

    2. Explain and indentify the conditions that should exist in order for a company to successfully install JIT.

    © BrainMass Inc. brainmass.com October 9, 2019, 9:59 pm ad1c9bdddf
    https://brainmass.com/business/just-in-time/204200

    Attachments

    Solution Preview

    Please see the attached excel sheet for detailed calculation

    1)
    a) I would like to make the following clarification and explanation
    unit price = $10,800,000 / 900000 units = $12. Both figures are obtained from the income statement
    New sales = $12 unit price * (900,000 ...

    Solution Summary

    The solution calculates cost savings using just in time inventory method for SteelTech, Inc.

    $2.19