Chapter 10, Problem 16E

Exercise 1-14A Using JIT to minimize waste and lost opportunity

Becky Shelton, a teacher at Kemp Middle School, is in charge of ordering the T-shirts to be sold for the school’s annual fund-raising project. The T-shirts are printed with a special Kemp School logo. In some years, the supply of T-shirts has been insufficient to satisfy the number of sales orders. In other years, T-shirts have been left over. Excess T-shirts are normally donated to some charitable organization. T-shirts cost the school $5 each and are normally sold for $12 each. Ms. Shelton has decided to order 700 shirts.

Required

a. If the school receives actual sales orders for 600 shirts, what amount of profit will the school earn? What is the cost of waste due to excess inventory?

b. If the school receives actual sales orders for 800 shirts, what amount of profit will the school earn? What amount of opportunity cost will the school incur?

c. Explain how a JIT inventory system could maximize profitability by eliminating waste and opportunity cost.