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

Rao Engineering adopts JIT and plans to cut average inventory from Rs 24,00,000 to Rs 6,00,000, a release of Rs 18,00,000. Cost of capital is 12% per annum. Storage and handling space costs of Rs 1,50,000 a year will be eliminated, insurance on inventory is 1% of inventory value, and obsolescence losses of 2% of inventory value will be avoided. However, annual JIT delivery and supplier costs rise by Rs 2,10,000. What is the net annual benefit of the switch?

The net annual benefit is Rs 2,10,000. Savings on Rs 18,00,000 released are interest Rs 2,16,000, insurance Rs 18,000 and obsolescence Rs 36,000, plus space Rs 1,50,000, totalling Rs 4,20,000. Deducting extra JIT costs of Rs 2,10,000 leaves Rs 2,10,000.

  1. ARs 2,10,000
  2. BRs 3,06,000
  3. CRs 3,66,000Correct
  4. DRs 4,20,000

Explanation

Savings on the Rs 18,00,000 released: interest 12% = 2,16,000; insurance 1% = 18,000; obsolescence 2% = 36,000; space 1,50,000. Total = 4,20,000 + ... compute: 2,16,000+18,000+36,000+1,50,000 = 4,20,000. Less extra costs 2,10,000 gives 2,10,000. Hence the correct net is Rs 2,10,000.

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