Neat Company wants to install a just-in-time (JIT) inventory system in order to significantly reduce its in-process inventories. The annual cost of the system is gauged to be $95,000. The financial manager estimates that with this system, the firm's average inventory investment will decline by 40% from its current level of $2.05 million. All other costs are expected to be unaffected by this system. The firm can earn 14% per year on equal-risk investments.
a. What is the annual cost savings expected to result from installation of the proposed JIT system?
b. Should the firm install the system?
Decline in inventory investment = $2.05 million * 0.40 = $820,000
Amount saved by the ...
The solution determines what is the annual cost savings expected to result from installation of the proposed JIT system.