Kate Connor, a teacher at Meadow 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 Meadow 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 $7 each and are normally sold for $15 each. Ms. Connor has decided to order 800 shirts.
a. If the school receives actual sales orders for 725 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 825 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.