The Champion Hardware Company manufactures specialty brass door handles at its Kitchener plant. Champion is considering implementing a JIT production system. The following are the estimated costs and benefits of
JIT production:
a. Annual additional tooling costs would be $100,000.
b. Average inventory would decline by 80% from the current level of $1,000,000.
c. Insurance, space, materials handling, and setup costs, which currently total $300,000 annually, would decline by 25%.
d. The emphasis on quality inherent in JIT production would reduce rework costs by 30%.
Champion currently incurs $200,000 in annual rework costs.
e. Improved product quality under JIT production would enable Champion to raise the price of its product by $4 per unit. Champion sells 40,000 units each year.
Champion’s required rate of return on inventory investment is 15% per year.
REQUIRED
1. Calculate the net benefit or cost to Champion if it adopts JIT production at the Kitchener plant.
2. What nonfinancial and qualitative factors should Champion consider when making the decision to adopt JIT production?
3. Suppose Champion implements JIT production at its Kitchener plant. Give examples of performance measures Champion could use to evaluate and control JIT production. What would be the benefit of Champion implementing an enterprise resource planning (ERP) system?