Houston Co. recently introduced a new inventory control system In an effort to improve its competitive position,
Question:
Houston Co. recently introduced a new inventory control system In an effort to improve its competitive position, Its management accountant assembled the following data regarding the recent change:
Item | Before new system | After new system |
Production cycle time | 90 days | 80 days |
Inventory level (daily average) | $450,000 | $400,000 |
Total sales | $2,500,000 | $2,700,000 |
Estimated cost data, % of sales | ||
Direct materials | 40% | 35% |
Direct labor | 20% | 15% |
Variable overhead | 15% | 15% |
Fixed overhead | 10% | 10% |
The company's inventory financing cost is estimated as 5% per year.
Required:
a) Estimate the net operating income that the company realized under the current inventory control system.
b) Estimate the net financial benefit (expressed in terms of operating income) that the company realized from the new inventory control system.
c) Estimate the net financial benefit (expressed in terms of operating income) that the company realized from switching to the new inventory control system.
d) List four (4) non-financial benefits the company might expect as a result to its move to new inventory control system.
