Chapter 20, Problem 20.34P

JIT purchasing, relevant benefits, relevant costs. (CMA, adapted) The Gibson Corporation is a manufacturing company that uses automatic stamping machines to manufacture garage doors from rolled sheets of raw steel. Gibson’s inventory of raw steel averages $600,000. Juan Sanchez, president of Gibson, and Jane Anderson, Gibson’s controller, are concerned about the costs of carrying inventory. The steel supplier is willing to supply steel in smaller lots at no additional charge. Anderson identifies the following effects of adopting a JIT inventory program to virtually eliminate steel inventory:

• Without scheduling any overtime, lost sales due to stockouts would increase by 700 units per year. However, by incurring overtime premiums of $90,000 per year, the increase in lost sales could be reduced to 300 units per year. This would be the maximum amount of overtime that would be feasible for Gibson.
• Two warehouses currently used for rolled steel storage would no longer be needed. Gibson rents one warehouse from another company under a cancelable leasing arrangement at an annual cost of $80,000. The other warehouse is owned by Gibson and contains 20,000 square feet. Three-fourths of the space in the owned warehouse could be rented for $2.50 per square foot per year. Insurance and property tax costs totaling $16,000 per year would be eliminated.

Gibson’s required rate of return on investment is 15% per year. Gibson’s budgeted income statement for the year ending December 31, 2017, (in thousands) is:

Revenues (20,000 units)		$16,000
Cost of goods sold
Variable costs	$8,450
Fixed costs	3,280
Total costs of goods sold		11,730
Gross margin		4,270
Marketing and distribution costs
Variable costs	$1,045
Fixed costs	890
Total marketing and distribution costs		1,935
Operating income		$ 2,335

1. 1. Calculate the estimated dollar savings (loss) for the Gibson Corporation that would result in 2017 from the adoption of JIT purchasing.

Required

1. 2. Identify and explain other factors that Gibson should consider before deciding whether to adopt JIT purchasing.