Division A and Division B are two manufacturing facilities producing the same product. Division A follows the conventional inventory management approach, whereas Division B follows the just-in-time inventory approach. Division A is generating higher operating profit than Division B, but Division A is also incurring higher inventory carrying costs than Division B.
The board wants to know what modifications it can make to the existing inventory management system to increase its operating profit. It asks the company's management accountant to look into possible changes that can be made.
Required
1. Why is Division A incurring a higher carrying cost than Division B?
2. What are probable reasons for Division A to follow the conventional inventory management approach?
3. Division B follows the just-in-time inventory approach. As a management accountant of the company, describe the benefits of a just-in-time inventory system.
4. The board of the company wants to modify the existing inventory management system to increase its operating profit. The management accountant has suggested that efficient implementation of a justin time inventory approach is the key to increasing the company's operating profits. Describe the key elements required for the successful operation of a just-in-time inventory approach.