The wismer corporation is an automotive supplier that uses automatic turning machines to manufacture precision parts from steel bars. wismer's inventory of raw steel averages $ 320,000. the steel supplier is willing to supply steel in smaller lots at no additional charge. The controller identifies the following effects of adopting a JIT inventory program to virtually eliminate steel inventory:
Without scheduling any overtime, lost sales due to stockouts would increase by 25,000 units per year. However, by incurring overtime premiums of $30,000 per year, the increase in lost sales could be reduced to 15,000 units per year. This would be the maximum amount of overtime that would be feasible for Wismer.
Two warehouses currently used for steel bar storage would no longer be needed. Wismer rents one warehouse from another company under a cancelable leasing arrangement at an annual cost of $60,000. The other warehouse is owned by Wismer and contains 16,000 square feet. Three- fourths of the space in the owned warehouse could be rented for $3.00 per square foot per year. Insurance and property tax costs totaling $10,000 per year would be eliminated.
Wismer required rate of return on investment is 15% per year. Wismer's budgeted income statement for the year ending December 31, 2017, (in thousands) is:
Revenues (1,000,000 units) $15,000
Cost of goods sold
Variable costs $6,380
Fixed costs $2,820
Total cost of goods sold 9,200
Gross margin 5,800
Marketing and distribution costs
Variable costs $2,010
Fixed costs 750
Total marketing and distribution costs 2,760
Operating income 3,040
Required:
1. Calculate the estimated dollar savings (loss) for the Wismer Corporation that would result in 2017 from the adoption of JIT purchasing.
2. Identify and explain other factors that Wismer should consider before deciding whether to adopt JIT purchasing.