Management of Laredo Enterprises Recently Decided to Adopt a Just-In-Time

question 37

Essay

Management of Laredo Enterprises recently decided to adopt a just-in-time inventory policy to curb steadily rising costs and free-up cash for purposes of investment.The company anticipates that inventory will decrease by $4,450,000,with the released funds to be invested at a 10% return for the firm.Additional data follow.
1.Reduced inventories should produce savings in insurance and property taxes of $46,000.
2.Reduced raw-material inventory levels and accompanying stockouts will cost Laredo $85,000.
3.Laredo will lease 80% of an existing warehouse to another firm for $2.50 per square foot.The warehouse has 40,000 square feet.
4.Four employees who currently earn $35,000 each will be directly affected by the just-in-time adoption decision.Three employees will be transferred to other positions with Laredo;one will be terminated.
5.A shift in suppliers is expected to result in the purchase and use of more expensive raw materials.However,these materials should give rise to fewer warranty and repair problems after Laredo's finished product is sold,resulting in a net savings for the company of $38,000.
6.Because of the need to handle an increased number of small shipments from suppliers,Laredo will remodel production and receiving-dock facilities at a cost of $750,000.The construction costs will be depreciated over a 10-year life.
Required:
A.

*Note: The cost of the three transferred employees is excluded because Laredo will continue to have these individuals on the payroll.
A.Compute the annual financial impact of Laredo's decision to adopt a just-in-time inventory system.
B.How would the number and size of incoming supplier shipments under a traditional purchasing system compare to the number and size of shipments under a just-in-time system? Explain any differences.
B.Under a traditional purchasing system,goods are purchased in large quantities,and then placed in inventory until useD.In contrast,with JIT,costly inventories are avoided by having the materials arrive "just in time" to be issued to production.Materials are therefore purchased only when needed,which often translates into numerous small acquisitions throughout the perioD.

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Definitions:

Compelling Picture

An image or representation that forcefully attracts attention or interest, often used in marketing to evoke emotion.

Product Directed

Concerned with marketing or advertising strategies focused specifically on the features and benefits of a product to influence consumer purchasing decisions.

Firm Wants

Describes the specific needs or desires that a company aims to fulfill through its operations, product offerings, or strategic decisions.

Test-marketing

A strategy used by companies to evaluate the viability of a new product or service in a limited market before a wider release.