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

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.

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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