Chapter 20, Problem 20.26E

JIT production, relevant benefits, relevant costs. 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:

1. a. Annual additional tooling costs $250,000 annually.
2. b. Average inventory would decline by 80% from the current level of $1,000,000.
3. c. Insurance, space, materials-handling, and setup costs, which currently total $400,000 annually, would decline by 20%.
4. 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.
5. 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.

1. 1. Calculate the net benefit or cost to The Knot if it adopts JIT production at the Spartanburg plant.

Required

1. 2. What nonfinancial and qualitative factors should The Knot consider when making the decision to adopt JIT production?
2. 3. Suppose The Knot implements JIT production at its Spartanburg plant. Give examples of performance measures The Knot could use to evaluate and control JIT production. What would be the benefit of The Knot implementing an enterprise resource planning (ERP) system?