JIT production, relevant benefits, relevant costs. The Colonial Hardware Company manufactures specialty brass door handles at its Lynchburg plant. Colonial is considering implementing a JIT production system. The following are the estimated costs and benefits of JIT production:
a. Annual additional tooling costs would be $200,000.
b. Average inventory would decline by 80% from the current level of $2,000,000.
c. Insurance, space, materials-handling, and setup costs, which currently total $600,000 annually, would decline by 25%.
d. The emphasis on quality inherent in JIT production would reduce rework costs by 30%. Colonial currently incurs $400,000 in annual rework costs.
e. Improved product quality under JIT production would enable Colonial to raise the price of its product by $8 per unit. Colonial sells 40,000 units each year.
Colonial’s required rate of return on inventory investment is 15% per year.
1. Calculate the net benefit or cost to Colonial if it adopts JIT production at the Lynchburg plant.
2. What nonfinancial and qualitative factors should Colonial consider when making the decision to adopt JIT production?
3. Suppose Colonial implements JIT production at its Lynchburg plant. Give examples of performance measures Colonial could use to evaluate and control JIT production. What would be the benefit of Colonial implementing an enterprise resource planning (ERP) system?
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