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?

Question

Quizplus · Accepted Answer

Feedback: 1.First-year anticipated financial results of change in plant layout: 11ea6e70_bd5d_b9be_8f54_dd16b99eaed0_TB1699_00 The proposed change in plant layout should not be implemented because its costs are greater than its benefits,if only one year's benefits are considered.
2.As indicated above,the financial analysis is limited to a one-year period.The methods discussed in Chapter 12 should be used to explore the desirability of making this capital expenditure.Further,the analysis in (1)above ignores important,nonfinancial considerations associated with the proposed investment.In short,the results reported in (1)above are incomplete at best.

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