(b)You are required to briefly explain the nature and objectives of JIT purchasing agreements concluded between components users and suppliers. 

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(a) Hexicon Inc manufactures andmarkets automatic washing machines. Among the many hundreds ofcomponents which it purchases each year from external suppliers forassembling into the finished article are drive belts, of which it uses40,000 units pa. It is considering converting its purchasing, deliveryand inventory control of this item to a just-in-time system. This willraise the number of orders placed but lower the administrative and othercosts of placing and receiving orders. If successful, this will provide the model for switching most of its inwards supplies on to this system. Details of actual and expected ordering and carrying costs are given inthe table below. Co= Ordering cost per order P= Purchase cost per item CH Inventory holding cost (as a percentage of the purchase cost) Actual Proposed $100 $2.50 20% $25 $2.50 20% To implement the new arrangements will require 'one-off reorganisation costs estimated at $4,000 which will be treated as arevenue item for tax purposes. The rate of corporation tax is 33% and Hexicon can obtain finance at 12%. The effective life span of the newsystem can be assumed to be eight years. Required: (1) Determine the effect of the new system on the economic order quantity (EOQ). (ii) Determine whether the new system is worthwhile in financial terms. (a) Hexicon Inc manufactures andmarkets automatic washing machines. Among the many hundreds ofcomponents which it purchases each year from external suppliers forassembling into the finished article are drive belts, of which it uses40,000 units pa. It is considering converting its purchasing, deliveryand inventory control of this item to a just-in-time system. This willraise the number of orders placed but lower the administrative and othercosts of placing and receiving orders. If successful, this will provide the model for switching most of its inwards supplies on to this system. Details of actual and expected ordering and carrying costs are given inthe table below. Co= Ordering cost per order P= Purchase cost per item CH Inventory holding cost (as a percentage of the purchase cost) Actual Proposed $100 $2.50 20% $25 $2.50 20% To implement the new arrangements will require 'one-off reorganisation costs estimated at $4,000 which will be treated as arevenue item for tax purposes. The rate of corporation tax is 33% and Hexicon can obtain finance at 12%. The effective life span of the newsystem can be assumed to be eight years. Required: (1) Determine the effect of the new system on the economic order quantity (EOQ). (ii) Determine whether the new system is worthwhile in financial terms.

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a Question 1 The economic order quantity EOQ is the number of units that should be ordered to minimize the total cost of inventory The total cost of i... View the full answer