Reference no: EM132937263

Question - Mill Corporation is a manufacturing company that uses automatic cutting machine to manufacture drinking bottles. Mill's inventory of raw steel averages $80,000. Lisa Blackpink, president of Mill, is concerned about the costs of carrying inventory. The contribution margin is 45% and the selling price is $50perunit. The steel supplier is willing to supply in smaller lots at no additional charge. Lisa identifies the following effects of adopting a JIT inventory program to virtually eliminate:

-Without scheduling any overtime, lost sales due to stock outs would increase by 600 units per year. However, by incurring overtime premiums of $70,000 per year, the increase in lost sales could be reduced to 400 units per year. This would be the maximum amount of overtime that would be feasible for Gibson.

-Two warehouses currently used for storage would no longer be needed. Mill rents one warehouse from another company under a cancelable leasing arrangement at an annual cost of $50,000. The other warehouse is owned by Gibson and contains 16,000 square feet. Three-fourths of the space in the owned warehouse could be rented for $3.50 per square foot per year.

-Insurance and property tax costs totaling $7,000 per quarter would be eliminated.

-Improved product quality under JIT production would enable Mill to raise the price of its product by $1 per unit. The Mill sells 10,000 units each year.

-General overhead charged include $45,000

-Gibson's required rate of return on investment is 12% per year.

Required -

(a) Calculate the net benefit or cost of adopting a JIT production system. (Show your workings)

(b) State TWO nonfinancial factors should Mill consider when making the decision to adopt JIT production?