The company has decided to implement just-in-time inventory management techniques. Using JIT will reduce the amount of inventory on hand at any point in time and save approximately $50,000 annually on inventory carrying costs. In addition, there will be 70 percent fewer purchase orders for inventory issued, but twice as many setups for production runs. The company will also be able to receive a 2 percent discount on raw materials purchases because of the long-term nature of the orders.
Overhead Cost Info Cost driver Driver Activity
Purchase orders $200000 # of orders 10,000
Receiving orders 25,000 # of orders 10,000
Setup cost 25,000 # of setups 5,000
Testing costs 48,000 # of tests 6,000
Machine maintenance 350000 # machine hours 10,000
A. If raw materials purchases are $1,000,000 per year (that is, the cost before the above mentioned changes are implemented), what quantitative impact will the change to JIT have on the overall costs for the company?
The impact would be total savings of $ ________.
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