$20-31($CMA$,$ adapted$)$ The CH Holling Corporation $($CHH$)$ is an automotive supplier that uses automatic turning machines to manufacture precision parts from steel bars. CHH$\text{'}$s inventory of raw steel averages $$600,000.$ John Oates, president of CHH $,$ and Helen Gorman, CHH$\text{'}$s controller, are concerned about the costs of carrying inventory. The steel supplier is willing to supply steel in smaller lots at no additional charge. Gorman identifies the following effects of adopting a JIT inventory program to virtually eliminate steel inventory:

Without scheduling any overtime, lost sales due to stockouts 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 per year. This would be the maximum amount of overtime that would be feasible for the company.

Two warehouses currently used for steel bar storage would no longer be needed. The company rents one warehouse from another company under a cancellable leasing arrangement at an annual cost of $$60,000.$ The company owns the other warehouse and contains $12,000$ square metres. Three$-$quarters of the space in the owned warehouse could be rented for $$1\mathrm{.}50$ per square metre per year. Insurance and property tax costs totalling $$14,000$ per year would be eliminated.

The required rate of return on investment is $20\%$ per year, and budgeted income statement for the year ending December $31,($in thousands$)$ is as follows: