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CMA Final · Strategic Cost Management · Just in Time (JIT)

Kaveri Auto Components moves to JIT and cuts average inventory from Rs 24,00,000 to Rs 6,00,000. Its carrying cost is 15% per annum on average inventory value. Annual cost of one-time JIT supplier-development and set-up reduction programme spread evenly is Rs 1,20,000 per year. What is the net annual saving from the change?

Net saving is Rs 1,50,000. Inventory falls by Rs 18,00,000, and at 15% carrying cost this saves Rs 2,70,000 a year. Deducting the Rs 1,20,000 annual programme cost leaves Rs 1,50,000. Quoting Rs 2,70,000 would wrongly ignore the cost of implementing JIT.

  1. ARs 1,50,000Correct
  2. BRs 2,70,000
  3. CRs 3,60,000
  4. DRs 1,20,000

Explanation

Inventory reduction = 24,00,000 - 6,00,000 = 18,00,000. Carrying cost saved = 15% x 18,00,000 = 2,70,000. Less programme cost 1,20,000 gives net saving 1,50,000. Rs 2,70,000 ignores the programme cost.

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