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 ExistingSituation AfterAdopting 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?

A. $74,100$954,700

B. $880,600

Explanation:

A. Preparation to estimate the financial benefits associated with the adoption of JIT

Current situationAfter JIT

Sales1,430,0001,810,000

Less costs

Production level support214,50072,400

(15%*1,430,000=214,500)

(4%*1,810,000=72,400)

Variable manufacturing overhead 400,400181,000

(28%*1,430,000=400,400)

(10%*1,810,000=181,000)

Direct material429,000362,000

(30%*1,430,000=429,000)

(20%*1,810,000=362,000)

Direct manufacturing labor286,000235,300

(20%*1,430,000=286,000)

(13%*1,810,000=235,300)

Inventory financing costs26,000 4,600

(10%*260,000=26,000)

(10%*46,000=4,600)

Total costs1,355,900855,300

Operating profits$74,100$954,700

(1,430,000-1,355,900)

(1,810,000-855,300)

Therefore the the financial benefits associated with the adoption of JIT will be $74,100$954,700

B. Preparation for the estimated change in annual operating income attributable to the JIT implementation

Current situationAfter JITChange

Sales1,430,000-1,810,000=-380,000

Less costs

Production level support214,500-72,400=142,100

Variable manufacturing overhead400,400-181,000=219,400

Direct material429,000-362,000=67,000

Direct manufacturing labor286,000-235,300=50,700

Inventory financing costs26,000-4,600=21,400

Total costs1,355,900-855,300=500,600

Operating profits74,100-954,700=880,600

Therefore the estimated change in annual operating income attributable to the JIT implementation will be 880,600

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