Question

1 ant cst an rs cas in taiile t To facilitate a move toward JIT production, AB Company is considering a change in its play layout. The plant controller, Anita Bentley, has been asked to evaluate the costs and benefits of the change in plant layout. After meeting with production and marketing managers, Anita has compiled the following estimates: Machine moving and reinstallation will cost $100,000 Total sales will increase by 20% to $1,200,000 because of a decrease in production cycle time required under the new plant layout. Average contribution margin is 31% of sales. Inventory held will decrease by 25%. Currently, the annual average carrying value of inventory is $200,000. The annual inventory financing cost is 15%. · · Calculate the net benefit/loss from this proposed change for year one. Machine moving and reinstallation Increase in contribution margin Savings in inventory carrying costs Net benefit/loss of change

Answer 1

a. Machine moving and reinstallation	(100,000)
b. Increase in cntribution margin (200,000*31%)	62,000
c. Savings in inventory carrying costs (200,000*25%*15%)	7,500
d. Net benefit/loss of change [a+b+c]	(30,500)

If only for year 1 the factors are considered then AB company will face a loss of $30,500 for the proposed change.