21-34 JIT purchasing, relevant benefits, relevant costs. (CMA, adapted) The Kate Steel Corporation is an automotive supplier that uses automatic turning machines to manufacture precision parts from steel bars Kate Steel's inventory of raw steel averages $400,000. Keith Abbott, president of Kate Steel, and Shaun Silvio, Kate Steel's controller, are concerned about the costs of carrying inventory. The steel supplier is willing to supply steel in smaller lots at no additional charge. Silvio identifies the following effects of adopting a JIT Inventory program to virtually eliminate steel inventory: ■ Without scheduling any overdme, lost sales due to stockouts would increase by 25,000 units per year. How- ever 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 overdime that would be feasible for Kate Steel. Two warehouses currently used for steel bar storage would no longer be needed. KateSteel rents one warehouse from another company under a cancelable leasing arrangement at an annual cost of $80,000. The other warehouse is owned by KateSteel 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. Kate Steers required rate of return on investment is 15% per year. KateSteel's budgeted Income statement for the year ending December 31, 2020, (In thousands) is: Revenues (1,000,000 units) Cost of goods sold Variable costs $15,000 $6,380 Fixed costs 2,820 Total costs of goods sold 9,200 Gross margin 5,800 Marketing and distribution costs Variable costs $2,010 Fixed costs 750 2,780 Operating Income $ 3,040 Total marketing and distribution costs 1. Calculate the estimated dollar savings (loss) for the KateSteel Corporation that would result in 2020 from the adoption of JIT purchasing. 2. Identity and explain other factors that KateSteel should consider before deciding whether to adopt JIT purchasing.
21-34 JIT purchasing, relevant benefits, relevant costs. (CMA, adapted) The Kate Steel Corporation is an automotive supplier that uses automatic turning machines to manufacture precision parts from steel bars Kate Steel's inventory of raw steel averages $400,000. Keith Abbott, president of Kate Steel, and Shaun Silvio, Kate Steel's controller, are concerned about the costs of carrying inventory. The steel supplier is willing to supply steel in smaller lots at no additional charge. Silvio identifies the following effects of adopting a JIT Inventory program to virtually eliminate steel inventory: ■ Without scheduling any overdme, lost sales due to stockouts would increase by 25,000 units per year. How- ever 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 overdime that would be feasible for Kate Steel. Two warehouses currently used for steel bar storage would no longer be needed. KateSteel rents one warehouse from another company under a cancelable leasing arrangement at an annual cost of $80,000. The other warehouse is owned by KateSteel 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. Kate Steers required rate of return on investment is 15% per year. KateSteel's budgeted Income statement for the year ending December 31, 2020, (In thousands) is: Revenues (1,000,000 units) Cost of goods sold Variable costs $15,000 $6,380 Fixed costs 2,820 Total costs of goods sold 9,200 Gross margin 5,800 Marketing and distribution costs Variable costs $2,010 Fixed costs 750 2,780 Operating Income $ 3,040 Total marketing and distribution costs 1. Calculate the estimated dollar savings (loss) for the KateSteel Corporation that would result in 2020 from the adoption of JIT purchasing. 2. Identity and explain other factors that KateSteel should consider before deciding whether to adopt JIT purchasing.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Transcribed Image Text:21-34 JIT purchasing, relevant benefits, relevant costs. (CMA, adapted) The Kate Steel Corporation is an
automotive supplier that uses automatic turning machines to manufacture precision parts from steel bars
Kate Steel's inventory of raw steel averages $400,000. Keith Abbott, president of Kate Steel, and Shaun Silvio,
Kate Steel's controller, are concerned about the costs of carrying inventory. The steel supplier is willing to
supply steel in smaller lots at no additional charge. Silvio identifies the following effects of adopting a JIT
Inventory program to virtually eliminate steel inventory:
■ Without scheduling any overdme, lost sales due to stockouts would increase by 25,000 units per year. How-
ever 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 overdime that would be feasible for Kate Steel.
Two warehouses currently used for steel bar storage would no longer be needed. KateSteel rents
one warehouse from another company under a cancelable leasing arrangement at an annual cost of
$80,000. The other warehouse is owned by KateSteel 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.
Kate Steers required rate of return on investment is 15% per year. KateSteel's budgeted Income statement
for the year ending December 31, 2020, (In thousands) is:
Revenues (1,000,000 units)
Cost of goods sold
Variable costs
$15,000
$6,380
Fixed costs
2,820
Total costs of goods sold
9,200
Gross margin
5,800
Marketing and distribution costs
Variable costs
$2,010
Fixed costs
750
2,780
Operating Income
$ 3,040
Total marketing and distribution costs
1. Calculate the estimated dollar savings (loss) for the KateSteel Corporation that would result in 2020
from the adoption of JIT purchasing.
2. Identity and explain other factors that KateSteel should consider before deciding whether to adopt JIT
purchasing.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps
Recommended textbooks for you
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education