Hammer Corporation is an automotive supplier that uses automatic machines to manufacture precision parts from steel bars. The company's inventory of raw steel averages $600,000, with a turnover rate of four times per year.
John Oates, president of the company, is concerned about the costs of carrying inventory. He is considering the adoption of the just-in-time inventory system to eliminate the need to carry any raw steel inventory. Oates has asked Helen Gorman, the controller, to evaluate the feasibility of just-in-time for the corporation. Gorman identified the following effects of adopting just-in-time.
(a) Without scheduling any overtime, lost sales due to stock outs would increase by 35,000 units per year. However, by incurring overtime premiums of $40,000 per year, the increase in lost sales could be reduced to 20,000 units. This would be the maximum amount of overtime that would be feasible for the company.
(b) Two warehouses presently used for steel bar storage would no longer be needed. The company rents one warehouse from another company at an annual cost of $60,000. The other warehouse is owned by the company and contains 12,000 square feet. Three-fourths of the space in the owned warehouse could be rented for $1.50 per square foot per year.
(c) Insurance and property tax costs totaling $14,000 per year would be eliminated. The company's projected operating results for the current calendar year are as follows:

Long-term capital investments by the company are expected to produce a rate of return of 12% after income tax. The company is subject to an effective income tax rate of 40%.
Required:
(a) Calculate the estimated before-tax dollar savings (or loss) that would result in the current year from the adoption of the just-in-time inventory system.
(b) Identify and explain the conditions that should exist in order for a company to successfully install just-in-time.

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Hammer Corporation Pro Forma Income Statement for the Year Ending December 31 (in Thousands of Dollars) Sales (900,000 units) Cost of goods sold: $10,800 $4,050 Variable Fixed $ 5,300 Gross profit Marketing and administrative expenses: Variable $ 900 Income before interest and income tax Income before income tax Net income Fixed Interest Income tax 1500 .400 S 2,900 900 S 2,000 s 1.200