Eastern Electronics Inc. maintains a WIP inventory at each of 10 work stations, and the average size of the inventory is 300 units per station. The physical flow of units into and out of each WIP location is first in, first out. The total number of instances in which some work station goes out of its control limits is expected to be 600 during the coming year. In two-thirds of these instances, the out-of-control condition is expected to be discovered immediately by the operator at that station; in the other one-third of these instances, a defect enters 5% of the units produced. These defective units enter WIP between stations, where they are discovered by the next station's operator. Every out-of-control condition is corrected as soon as it is discovered. The average variable cost of a unit in WIP is $80, and the average loss from an out-of-control conditions is $25 per defective unit produced. The annual cost of carrying WIP is 25% of the cost of the inventory.
Management plans to reduce the number of units held at every work station by 30%. The rate of final output will be unchanged and no other changes will be made in the system.
Required:
Using only the information given, calculate the annual savings expected from the change planned by management, assuming no defective unit contains more than one defect.