Question

You recently began work at Colt Kitchen Ltd. The company is a well-known distributor of gourmet foods. Like many similar companies, Colt Kitchen currently maintains a relatively large warehouse in which a wide variety of products are stored. Most other food wholesalers also maintain large warehouses; however, Sharon Oblinger, the company’s president, is very concerned about the company’s ability to maintain and sell the freshest products. She has also grown increasingly concerned about the company’s cash management practices. She has accumulated the following inventory data:
Spices ................ $ 28,000
Coffee and tea .............. 61,060
Pasta ................. 32,140
Vegetables .............. 108,460
Health supplements ............ 84,700
Dairy ................ 46,975
Meats ................ 185,610
Personal products ............ 71,440
Household ............... 88,200
Pet care ................ 15,920
Ken Martin, cofounder and chief strategist, is equally concerned about the company, but he believes that specialty food shops that sell the company’s products expect to be able to order items from Colt Kitchen and have them shipped immediately. In short, Ken thinks that maintaining an adequate inventory is crucial to the company’s future. Sharon and Ken have set a meeting for late next week to decide on the company’s adoption of a just-in-time inventory management system. Sharon is proposing that inventory be reduced by 80 percent and that warehouse employment be decreased by 30 percent. Currently, the 10 warehouse employees earn an average gross pay of $350 per week.

Required
A. What impact will reducing inventory by 80 percent have on Colt Kitchen’s ability to meet its customer demand?
B. If Sharon and Ken agree to reduce inventory, how should the company accomplish the reduction?
C. Assume that Colt Kitchen can invest cash that would otherwise be “tied up” in inventory. Calculate the potential interest income if the company were to receive an annual interest rate of 3.5 percent on the cash that would otherwise be invested in the inventory (represented by the 80 percent reduction).
D. Although annual sales are currently $3.8 million, Ken believes that adopting a just-in-time system will ultimately cause problems such that customers will turn to other wholesalers for their needs. Ken is estimating lost revenues of 20 percent. If the company’s gross profit is 30 percent of sales, what impact will the lost revenues have on the company’s income statement?
E. Should Colt Kitchen adopt the just-in-time inventory management system? Why or why not?



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  • CreatedMarch 11, 2015
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