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?

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter9: Capital Budgeting And Cash Flow Analysis
Section: Chapter Questions
Problem 18P
icon
Related questions
Question
100%
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?
Expert Solution
steps

Step by step

Solved in 2 steps

Blurred answer
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Essentials of Business Analytics (MindTap Course …
Essentials of Business Analytics (MindTap Course …
Statistics
ISBN:
9781305627734
Author:
Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Publisher:
Cengage Learning
Managerial Accounting
Managerial Accounting
Accounting
ISBN:
9781337912020
Author:
Carl Warren, Ph.d. Cma William B. Tayler
Publisher:
South-Western College Pub
Financial And Managerial Accounting
Financial And Managerial Accounting
Accounting
ISBN:
9781337902663
Author:
WARREN, Carl S.
Publisher:
Cengage Learning,
Cornerstones of Cost Management (Cornerstones Ser…
Cornerstones of Cost Management (Cornerstones Ser…
Accounting
ISBN:
9781305970663
Author:
Don R. Hansen, Maryanne M. Mowen
Publisher:
Cengage Learning