Question

As part of its commitment to quality, the J. J. Borden manufacturing company is proposing to introduce just-in-time (JIT) production methods. Managers of the company have an intuitive feel regarding the financial benefits associated with a change to JIT, but they would like to have some data to inform their decision making in this regard. You are provided with the following data:

Item	Existing Situation				After Adopting JIT
Manufacturing costs as percentage of sales:
Product-level support		15	%			4	%
Variable manufacturing overhead		28				10
Direct materials		30				20
Direct manufacturing labor		20				13
Other financial data:
Sales revenue	$	1,430,000			$	1,810,000
Inventory of WIP		260,000				46,000
Other data:
Manufacturing cycle time		60	days			30	days
Inventory financing costs (per annum)		10	%			10	%

Required:

As the management accountant for the company, prepare an estimate the financial benefits associated with the adoption of JIT. Specifically, what is the estimated change in annual operating income attributable to the JIT implementation?

Answer 1

			Current situation	After JIT	Change
sales			1430000	1810000	-380000
less: costs
production level support			214500	72400	142100
variable manufacturing overhead			400400	181000	219400
direct material			429000	362000	67000
direct manufacturing labor			286000	235300	50700
inventory financing costs			26000	4600	21400
total costs			1355900	855300	500600
Operating profits			74100	954700	880600