General accounting KELLOGG COMPANY, A LEADING CEREALMANUFACTURER, IS CONSIDERING IMPLEMENTINGA JUST-IN-TIME (JIT) INVENTORY SYSTEM FOR ITSRAW MATERIALS. THE COMPANY CURRENTLYSPENDS $500,000 ANNUALLY ON HOLDING COSTSFOR RAW MATERIALS INVENTORY.IMPLEMENTING THE JIT SYSTEM WOULD REDUCETHESE HOLDING COSTS BY 80% BUT WOULDREQUIRE AN INITIAL INVESTMENT OF $1,200,000IN NEW EQUIPMENT AND SOFTWARE. THE NEWSYSTEM IS EXPECTED TO HAVE A USEFUL LIFE OF10 YEARS WITH NO SALVAGE VALUE. KELLOGGUSES STRAIGHT-LINE DEPRECIATION AND HAS AREQUIRED RATE OF RETURN OF 12%. SHOULDKELLOGG IMPLEMENT THE JIT SYSTEM BASED ONFINANCIAL CONSIDERATIONS ALONE?

To determine if Kellogg should implement the Just-In-Time (JIT) inventory system based on financial…

Answered: KELLOGG COMPANY, A LEADING CEREAL…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 18P

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The Bremer Co. manufactures cordless telephones Bremer is planning to implement a JIT production system, which requires annual tooling costs of $150,000. Bremer estimates that the following annual benefits would arise from JIT production. a. Average inventory will decline by $700,000 from $900,000 to $200,00 b. Insurance, space, materials handling, and setup costs, which currently total $200,00 would decline by 30% c. The emphasis on quality inherent in JIT system would reduce rework costs by 20% Bremer currently incurs $350,000 on rework. d. Better quality would eneble Bremer to raise the prices of its products by $3 per unit. Bremer sells $30,000 unit each year. Bremer required rate of return on inventory investment is 12% per year Required: Calculate the net benefit or cost to the Bremer Corporation From implementing a JIT production system.
Axdew Limited is considering whether to manufacture an improved, more expensive version of their current line of best-selling lava lamps. Axdew currently spends $15,000 per year on maintenance and $80,000 on full-time salaries for staff. Maintenance costs are expected to remain the same but an additional labourer will need to be hired at an annual cost of $30,000. Manufacture of the newer version will require re-tooling of its existing machinery at a cost of $40,000. Axdew paid consultants a fee of $30,000 for a feasibility study to determine the viability of the new product. Which of the costs discussed above need to be considered by management in deciding whether to proceed with the new product? Justify your answer.
Praveen Co. manufactures and markets a number of rope products. Management is considering the future of Product XT, a special rope for hang gliding, that has not been as profitable as planned. Since Product XT is manufactured and marketed independently of the other products, its total costs can be precisely measured. Next year’s plans call for a $200 selling price per 100 yards of XT rope. Its fixed costs for the year are expected to be $270,000, up to a maximum capacity of 700,000 yards of rope. Forecasted variable costs are $140 per 100 yards of XT rope. Required 1. Estimate Product XT’s break-even point in terms of (a) sales units and (b) sales dollars. 2. Prepare a contribution margin income statement showing sales, variable costs, and fixed costs for Product XT at the break-even point.
ClockWatchers is about to introduce a new employee monitoring tool and has determined that it will charge $100 per unit. The company must decide whether or not to purchase a high-capacity manufacturing machine. If the high-capacity machine is selected, then the cash fixed costs will be $5,000 per year, with variable costs of $50 per unit and depreciation and amortisation expenses of $2,000. Otherwise the fixed costs will be $2,000, with variable costs of $75 per unit and depreciation and amortisation expenses of $500. If EBIT Break-even is how the company evaluates its projects, then above what level of expected sales should ClockWatchers choose the high fixed cost alternative? 60 units 90 units120 units 180 units
Galactic is contemplating the purchase of a new $570,000 computer-based order entry system. The system will be depreciated using the MACRS 5-year depreciation schedule. It will be worth $70,000 at the end of the project in 6 years. You will save $40,000 before taxes per year in order processing costs, and you will be able to reduce net working capital by $30,000. You will also increase sales by $100,000 per year for the first year and this number will increase by 3% per year. If the tax rate is 30 percent, and the required rate of return is 10%, what is the NPV of this project?
Disk City, Inc., is a retailer for digital video disks. The projected net income for the current year is $200,000 based on a sales volume of 200,000 video disks. Disk City has been selling the disks for $16 each. The variable costs consist of the $10 unit purchase price of the disks and a handling cost of $2 per disk. Disk City's annual fixed costs are S600,000. Management is planning for the coming year, when it expects that the unit purchase price of the video disks will increase 30 percent. (Ignore income taxes.) Required: 1. Calculate Disk City's break-even point for the current year in number of video disks.
A large food-processing corporation is considering using laser technology to speed up and eliminate waste in the potato-peeling process. To implement the system, the company anticipates needing $3.5 million to purchase the industrial-strength lasers. The system will save $1,550,000 per year in labor and materials. However, it will require an additional operating and maintenance cost of $350,000. Annual income taxes will also increase by $150,000. The system is expected to have a 10-year service life and will have a salvage value of about $200,000. If the company's MARR is 18%, use the NPW method to justify the project. Click the icon to view the interest factors for discrete compounding when MARR = 18% per year. The NPW of the project is $ thousand. (Round to the nearest whole number.) X More Info Single Payment Compound Amount Equal Payment Series Sinking Fund Factor Compound Amount Factor (F/A, i, N) Present Worth Factor Factor (F/P, i, N) (A/F, i, N) (P/A, i, N) 1.1800 1.0000 1.0000…
A large food-processing corporation is considering using laser technology to speed up and eliminate waste in the potato-peeling process. To implement the system, the company anticipates needing $3.5 million to purchase the industrial-strength lasers. The system will save $1,550,000 per year in labor and materials. However, it will require an additional operating and maintenance cost of $350,000. Annual income taxes will also increase by $150,000. The system is expected to have a 10-year service life and will have a salvage value of about $200,000. If the company's MARR is 18%, use the NPW method to justify the project. Equal Payment Series Sinking Present Compound Amount Factor Fund Single Payment Compound Present Amount Worth Factor (F/P, i, N) 1.1800 Worth Capital Recovery Factor Factor Factor Factor N (P/F, i, N) (F/A, i, N) (A/F, i, N) (P/A, i, N) (A/P, i, N) 1 0.8475 1.0000 1.0000 0.8475 1.1800 2 1.3924 0.7182 2.1800 0.4587 1.5656 0.6387 3 1.6430 0.6086 3.5724 0.2799 2.1743 0.4599…
Omicron Industries is analyzing the purchase of a new $415,000 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $42,000 at the end of that time. You will save $141,000 before taxes per year in order processing costs. You will be able to reduce Net Working Capital by $39,000 at the beginning of the project. Net Working Capital will revert back to normal at the end of the project. If the tax rate is 24 percent, what is the IRR for this project? Note: The Net Working Capital is the opposite in this problem from the examples in class. Positive to start and negative at the end. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) IRR %
Expando, Inc, is considering the possibility of building an additional factory that would produce a new addition to their product line. The company is currently considering three options.The first is a small facility that it could build at a cost of $6 million. If demand for new products is tow, the company expects to receive $8 million in discounted revenues (present value of future revenues) with the small facility.On the other hand, if demand is high it expects $12 million in discounted revenues using the small facility. The second option is to build a large factory at a cost of $9 million. Were demand to be low, the company would expect $10 million in discounted revenues with the large plant. If demand is high, the company estimates that the discounted revenues would be $14 million.The third option is to outsource their production, it would cost them nothing. The company would expect to receive $1.6 million in discounted revenues if the demand was low and $3.1 million if the demand…
"Disk City, Inc., is a retailer for digital video disks. The projected net income for the current year is $200,000 based on a sales volume of 200,000 video disks. Disk City has been selling the disks for $16 each. The variable costs consist of the $10 unit purchase price of the disks and a handling cost of $2 per disk. Disk City’s annual fixed costs are $600,000. Management is planning for the coming year, when it expects that the unit purchase price of the video disks will increase 30 percent. (Ignore income taxes.). "Required: 1.Calculate Disk City’s break-even point for the current year in number of video disks. 2.What will be the company’s net income for the current year if there is a 10 percent increase in projected unit sales volume? 3.What volume of sales (in dollars) must Disk City achieve in the coming year to maintain the same net income as projected for the current year if the unit selling price remains at $16? 4.In order to cover a 30 percent increase in…
The Knot manufactures men’s neckwear at its Spartanburg plant. The Knot is considering implementing a JIT production system. The following are the estimated costs and benefits of JIT production: a. Annual additional tooling costs $250,000 annually. b. Average inventory would decline by 80% from the current level of $1,000,000. c. Insurance, space, materials-handling, and setup costs, which currently total $400,000 annually, would decline by 20%. d. The emphasis on quality inherent in JIT production would reduce rework costs by 25%. The Knot currently incurs $160,000 in annual rework costs. e. Improved product quality under JIT production would enable The Knot to raise the price of its product by $2 per unit. The Knot sells 100,000 units each year. The Knot’s required rate of return on inventory investment is 15% per year. Q. What nonfinancial and qualitative factors should The Knot consider when making the decision to adopt JIT production?

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