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?

Essentials of Business Analytics (MindTap Course List)

2nd Edition

ISBN:9781305627734

Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Publisher:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson

Chapter15: Decision Analysis

Section: Chapter Questions

Problem 5P: Hudson Corporation is considering three options for managing its data warehouse: continuing with its...

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Bhupatbhai
Arnold Inc. is considering a proposal to manufacture high-end protein bars used as food supplements by body builders. The project requires use of an existing warehouse, which the firm acquired three years ago for $1 million and which it currently rents out for $116,000. Rental rates are not expected to change going forward. In addition to using the warehouse, the project requires an upfront investment into machines and other equipment of $1.3 million. This investment can be fully depreciated straight-line over the next 10 years for tax purposes. However, Arnold Inc. expects to terminate the project at the end of eight years and to sell the machines and equipment for $581,000. Finally, the project requires an initial investment into net working capital equal to 10% of predicted first-year sales. Subsequently, net working capital is 10% of the predicted sales over the following year. Sales of protein bars are expected to be $4.5 million in the first year and to stay constant for eight…
Vaibh