Problem 16-7 Cost Trade-Offs in Short-Term Financial Management Geet Industries
ID: 2723513 • Letter: P
Question
Problem 16-7 Cost Trade-Offs in Short-Term Financial Management Geet Industries wants to install a just-in-time (JIT) inventory system in order to significantly reduce its in-process inventories. The annual cost of the system is gauged to be $91,000. The financial manager estimates that with this system, the firm's average inventory investment will decline by 37% from its current level of $2.05 million. All other costs are expected to be unaffected by this system. The firm can earn 14% per year on equal-risk investments. What is the annual cost savings expected to result from installation of the proposed JIT system? Round your answer to the nearest whole dollar. $ per year Should the firm install the system?
Explanation / Answer
Annual cost of installation of just in time inventory system is $91000 Current level of firm's average inventory investment = $2.05 million After installation of JIT system, the average inventory investment will reduce by 37% i.e 37% * $2.05 million = $758500 Firm can invest these fund in 14% equal risk investment and will earn = 14% * $758500 = $106190 yearly Net saving from installation of JIT system = $106190 - $91000 = $15190 The annual saving expected from JIT installation = $15190 The firm should install the JIT system.