Fifth edition Alnoor Bhimani Charles T. Horngren Srikant M. Datar Madhav V. Rajan Farah Ahamed

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21.20 JIT production, relevant benefits, relevant costs. (20 min) 1

Solution Exhibit 21.19
Annual relevant costs of purchasing from Grano and Henco

Relevant item
Incremental costs
of purchasing
from Grano
Incremental costs
of purchasing
from Henco
Purchasing costs
€50 per unit
×
4,000 units per year
€49 per unit
×
4,000 units per year Inspection costs
€20 per delivery
×
50 deliveries
€28 per delivery
×
50 deliveries

€200,000

1,000

€196,000

1,400 Required return in investment
15% per year
×
€50
×
40* units of average stock per year
15% per year
×
€49
×
40* units of average stock per year
300

294 Outlay carrying costs
(insurance, material handling, breakage, etc)
€11 per unit per year
×
40* units of average stock per year
€10 per unit per year
×
40* units of average stock per year

440

400
Stockout costs
€25 per car
×
20 cars
€26 per car
×
150 cars Customer return costs
€21 per car returned
×
40 cars returned
€21 per car returned
×
140 cars returned Total annual relevant costs

500

840

€203,080

3,900

2,940
€204,934 Annual difference in favour of Grano
↑
€1,854
↑ Order quantity ÷ 2 = 80 ÷ 2 = 40
21.20 JIT production, relevant benefits, relevant costs.
(20 min)
1
Solution Exhibit 21.20 presents the annual net benefit of €154,000 to Turun
Telelaitos of implementing a JIT production system.
2
Other non-financial and qualitative factors that Turun should consider in deciding whether it should implement a JIT system include
a
The possibility of developing and implementing a detailed system for integrating the sequential operations of the manufacturing process. Direct materials must arrive when needed for each subassembly so that the production process functions smoothly.
b
The ability to design products that use standardised parts and reduce manufacturing time.
c
The ease of obtaining reliable vendors who can deliver quality direct materials on time with minimum lead time.

Bhimani, Horngren, Datar and Rajan, Management and Cost Accounting, 5
th
Edition, Instructor’s Manual
© Pearson Education Limited 2012
d
Willingness of suppliers to deliver smaller and more frequent orders.
e
The confidence of being able to deliver quality products on time. Failure to do so would result in customer dissatisfaction.
f
The skill levels of workers to perform multiple tasks such as minor repairs and maintenance, and quality testing and inspection.

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