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. 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).

Question

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. 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).

Quizplus · Accepted Answer

The Answer of 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. 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).

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