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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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Accounting