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KELLOGG COMPANY, A LEADING CEREAL MANUFACTURER, IS CONSIDERING IMPLEMENTING A JUST-IN-TIME (JIT) INVENTORY SYSTEM FOR ITS RAW MATERIALS. THE COMPANY CURRENTLY SPENDS $500,000 ANNUALLY ON HOLDING COSTS FOR RAW MATERIALS INVENTORY. IMPLEMENTING THE JIT SYSTEM WOULD REDUCE THESE HOLDING COSTS BY 80% BUT WOULD REQUIRE AN INITIAL INVESTMENT OF $1,200,000 IN NEW EQUIPMENT AND SOFTWARE. THE NEW SYSTEM IS EXPECTED TO HAVE A USEFUL LIFE OF 10 YEARS WITH NO SALVAGE VALUE. KELLOGG USES STRAIGHT-LINE DEPRECIATION AND HAS A REQUIRED RATE OF RETURN OF 12%. SHOULD KELLOGG IMPLEMENT THE JIT SYSTEM BASED ON FINANCIAL CONSIDERATIONS ALONE?

KELLOGG COMPANY, A LEADING CEREAL MANUFACTURER, IS CONSIDERING IMPLEMENTING A JUST-IN-TIME (JIT) INVENTORY SYSTEM FOR ITS RAW MATERIALS. THE COMPANY CURRENTLY SPENDS $500,000 ANNUALLY ON HOLDING COSTS FOR RAW MATERIALS INVENTORY. IMPLEMENTING THE JIT SYSTEM WOULD REDUCE THESE HOLDING COSTS BY 80% BUT WOULD REQUIRE AN INITIAL INVESTMENT OF $1,200,000 IN NEW EQUIPMENT AND SOFTWARE. THE NEW SYSTEM IS EXPECTED TO HAVE A USEFUL LIFE OF 10 YEARS WITH NO SALVAGE VALUE. KELLOGG USES STRAIGHT-LINE DEPRECIATION AND HAS A REQUIRED RATE OF RETURN OF 12%. SHOULD KELLOGG IMPLEMENT THE JIT SYSTEM BASED ON FINANCIAL CONSIDERATIONS ALONE?

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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KELLOGG COMPANY, A LEADING CEREAL MANUFACTURER, IS CONSIDERING IMPLEMENTING A JUST-IN-TIME (JIT) INVENTORY SYSTEM FOR ITS RAW MATERIALS. THE COMPANY CURRENTLY SPENDS $500,000 ANNUALLY ON HOLDING COSTS FOR RAW MATERIALS INVENTORY. IMPLEMENTING THE JIT SYSTEM WOULD REDUCE THESE HOLDING COSTS BY 80% BUT WOULD REQUIRE AN INITIAL INVESTMENT OF $1,200,000 IN NEW EQUIPMENT AND SOFTWARE. THE NEW SYSTEM IS EXPECTED TO HAVE A USEFUL LIFE OF 10 YEARS WITH NO SALVAGE VALUE. KELLOGG USES STRAIGHT-LINE DEPRECIATION AND HAS A REQUIRED RATE OF RETURN OF 12%. SHOULD KELLOGG IMPLEMENT THE JIT SYSTEM BASED ON FINANCIAL CONSIDERATIONS ALONE?
Transcribed Image Text:KELLOGG COMPANY, A LEADING CEREAL MANUFACTURER, IS CONSIDERING IMPLEMENTING A JUST-IN-TIME (JIT) INVENTORY SYSTEM FOR ITS RAW MATERIALS. THE COMPANY CURRENTLY SPENDS $500,000 ANNUALLY ON HOLDING COSTS FOR RAW MATERIALS INVENTORY. IMPLEMENTING THE JIT SYSTEM WOULD REDUCE THESE HOLDING COSTS BY 80% BUT WOULD REQUIRE AN INITIAL INVESTMENT OF $1,200,000 IN NEW EQUIPMENT AND SOFTWARE. THE NEW SYSTEM IS EXPECTED TO HAVE A USEFUL LIFE OF 10 YEARS WITH NO SALVAGE VALUE. KELLOGG USES STRAIGHT-LINE DEPRECIATION AND HAS A REQUIRED RATE OF RETURN OF 12%. SHOULD KELLOGG IMPLEMENT THE JIT SYSTEM BASED ON FINANCIAL CONSIDERATIONS ALONE?
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