Question

20-26 JIT production, relevant benefits, relevant costs. The Knot manufactures men's neckware at its Spartanburg plant. The Knot is considering implementing a JIT production system. The following are estimated costs and benefits of JIT production: a. Annual additional tooling costs $250,000 annually. b. Average inventory would decline by 80% from the current level of $1,000,000. c. Insurance, space, materials-handling, and setup costs, which currently total $400,000 annually, would decline by 20%. d. The emphasis on quality inherent in JIT production would reduce rework costs by 25%. The Knot currently incurs $160,000 in annual rework costs. e. Improved product quality under JIT would enable The Knot to raise the price of its product by $2 per unit. The Knot sells 100,000 units per year. The Knot's required rate of return on inventory investment is 15% per year. 1. Calculate the net benefit or cost to The Knot if it adopts JIT production at the Spartanburg plant. 2. What nonfinancial and qualatative factors should The Knot consifer when making the decision to adopt JIT production? 3. Suppose The Knot implements JIT production at its Spartanburg plant. Give examples of performance measure The Knot could use to evaluate and control JIT production. What would the benefit of The Knot implementing an enterprise resource planning (ERP) system?

Answer 1

The net benefit to The Knot if it adopts JIT production at the Spartanburg plant is $200000.

How to illustrate the information?

Based on the information given, the net benefit will be:

= $1,000,000 × (1 - 80%)

= $1,000,000 × 0.2

= $200,000

The nonfinancial and qualatative factors that The Knot should consider when making the decision to adopt JIT production are:

• Development of a detailed system.
• Willingness of suppliers to deliver smaller and more frequent orders.
• Skill level of workers should be enhanced.

The benefit of The Knot implementing an enterprise resource planning (ERP) system is that it gives access to operating information in response to the supply.

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