Because of the Need to Improve Its Competitive Standing,the XYZ

question 19

Essay

Because of the need to improve its competitive standing,the XYZ Company has embraced a JIT production philosophy.To facilitate the transition to JIT,the company is contemplating a change in its production layout.You,as the management accountant for the company,have recently been asked to prepare an analysis of relevant costs and benefits associated with the proposed change in plant layout.After consulting with relevant managers within the company,you have come up with the following pieces of information:
(a)Estimated cost to move/reinstall existing machinery and equipment = $100,000.
(b)Estimated increase in sales = 20% (to $1,200,000).(This increase is based on an assumed decrease in production cycle time under the new plan layout.Past experience shows an average contribution margin of 31% of sales revenue. )
(c)Inventory-related costs are predicted to decrease by 25%.Currently,the company holds an average inventory of approximately $200,000.You estimate that inventory-holding costs amount to 15% (on an annual basis).
Required:
1.Should the company implement the proposed change in plant layout? Show calculations to support your answer.
2.What other considerations might be made before a decision regarding the change in factory layout is made?

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Definitions:

Dividend Yield Ratio

A financial ratio that shows how much a company pays out in dividends each year relative to its share price, often used by investors to gauge the income a stock provides.

Dividends

Payments made by a corporation to its shareholder members, usually as a distribution of profits.

Common Stock

A type of equity security that represents ownership in a corporation, providing voting rights and a share in the company's profits via dividends.

Book Value Per Share

A financial measure that divides a company's net asset value less any intangible assets and liabilities by the number of outstanding shares.