Harrison Industries produces 4,000 lunch boxes each day.The average number of units in work in process is 12,000,having an average cost of $60,000.The annual carrying costs related to inventory are 10%. Consultants have determined that the work in process could be reduced by as much as a third by rearranging the factory floor.What would the reduction in annual carrying costs be if Harrison is able to implement the recommended changes?

Question

Quizplus · Accepted Answer

Reducing work in process by a third means reducing it by 4,000 units (1/3 of 12,000). The cost reduction would be 4,000 units * ($60,000/12,000 units) = $20,000. The annual carrying cost reduction would be 10% of $20,000, which is $2,000.

Harrison Industries Produces 4,000 Lunch Boxes Each Day