As part of its commitment to quality, the J. J. Borden manufacturing company is proposing...
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Accounting
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
Existing Situation
After Adopting 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?
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