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:

Water Table

The water table is the upper level of an underground surface in which the soil or rocks are permanently saturated with water, delineating the boundary between the aquifer's unsaturated zone and saturated zone.

Topography

The arrangement of the natural and artificial physical features of an area, including its relief and the position of its features.

Artesian Well

A well tapping a confined aquifer, where the water pressure is sufficient to bring the water to the surface without pumping.

Water Table

The level below which the ground is completely saturated with water, marking the boundary between the unsaturated soil and the groundwater.