Assignment Material

Questions

1. 21-1. Why do better decisions regarding the purchasing and managing of goods for sale frequently cause dramatic percentage increases in net income?
2. 21-2. Name six cost categories that are important in managing goods for sale in a retail company.
3. 21-3. What assumptions are made when using the simplest version of the economic-order-quantity (EOQ) decision model?
4. 21-4. Give examples of costs included in annual carrying costs of inventory when using the EOQ decision model.
5. 21-5. Give three examples of opportunity costs that typically are not recorded in accounting systems, although they are relevant when using the EOQ model in the presence of demand uncertainty.
6. 21-6. What are the steps in computing the cost of a prediction error when using the EOQ decision model?
7. 21-7. Why might goal-congruence issues arise when managers use an EOQ model to guide decisions on how much to order?
8. 21-8. “JIT purchasing has many benefits but also some risks.” Do you agree? Explain briefly.
9. 21-9. What are three factors causing reductions in the cost to place purchase orders for materials?
10. 21-10. “You should always choose the supplier that offers the lowest price per unit.” Do you agree? Explain.
11. 21-11. What is supply-chain analysis, and how can it benefit manufacturers and retailers?
12. 21-12. What are the main features of JIT production, and what are its benefits and costs?
13. 21-13. Distinguish inventory-costing systems using sequential tracking from those using backflush costing.
14. 21-14. Describe three different versions of backflush costing.
15. 21-15. Discuss the differences between lean accounting and traditional cost accounting.

Multiple-Choice Questions

1. 21-16. The order size associated with the economic-order-quantity (EOQ) model will necessarily decline if
   1. a. Ordering costs rise.
   2. b. Storage costs rise.
   3. c. Insurance costs for materials in storage fall.
   4. d. Stockout costs rise.
2. 21-17. Jack’s Tracks sells 24,000 custom-designed GoKarts per year. These GoKarts are sold evenly throughout the year. The manufacturer charges Jack a $50 processing cost per order, and Jack incurs a carrying cost of $240 per year including storing each GoKart at a local warehouse. What is the economic order quantity for ordering materials?
   1. a. 100
   2. b. 1,000
   3. c. 2,000
   4. d. 10,000
3. 21-18. Jill’s Custom Bags manufacturers and sells 12,000 custom designer bags per year, each requiring three yards of a specially manufactured fabric. These bags are sold evenly throughout the year. The materials for these bags require 2 months’ lead time. Jill wants to maintain a safety stock of sufficient material to meet 1 month’s demand. What is Jill’s reorder point?
   1. a. 3,000
   2. b. 6,000
   3. c. 9,000
   4. d. 12,000
4. 21-19. Lyle Co. has only one product line. For that line, the reorder point is 500 units, the lead time for production is 3 weeks, and the sales volume is estimated at 50 units per week. Lyle has established which of the following amounts as its safety stock?
   1. a. 150
   2. b. 350
   3. c. 500
   4. d. 650
5. 21-20. Just-in-time inventory assumes all of the following, except
   1. 1. Zero defects.
   2. 2. Resources will only be introduced as they are needed.
   3. 3. Just-in-time inventory presumes first-in, first-out costing.
   4. 4. Production of components only occurs when requested further downstream in the manufacturing cycle.

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Exercises

1. 21-21. ECONOMIC ORDER QUANTITY FOR RETAILER. Wonder Line (WL) operates a megastore featuring sports merchandise. It uses an EOQ decision model to make inventory decisions. It is now considering inventory decisions for its Los Angeles Galaxy soccer jerseys product line. This is a highly popular item. Data for 2020 are as follows:

1. Each jersey costs WL $50 and sells for $100. The $8 carrying cost per jersey per year consists of the required return on investment of  plus $3.00 in relevant insurance, handling, and storage costs. The purchasing lead time is 5 days. WL is open 365 days a year.
   1. Required
   2. 1. Calculate the EOQ.
   3. 2. Calculate the number of orders that will be placed each year.
   4. 3. Calculate the reorder point.
2. 21-22. ECONOMIC ORDER QUANTITY, EFFECT OF PARAMETER CHANGES (CONTINUATION OF 21-21). Sportsman Textiles (ST) manufactures the Galaxy jerseys that Wonder Line (WL) sells to its customers. ST has recently installed computer software that enables its customers to conduct “one-stop” purchasing using state-of-the-art Web site technology. WL’s ordering cost per purchase order will be $40 using this new technology.
   1. Required
   2. 1. Calculate the EOQ for the Galaxy jerseys using the revised ordering cost of $40 per purchase order. Assume all other data from Exercise 21-21 are the same. Comment on the result.
   3. 2. Suppose ST proposes to “assist” WL. ST will allow WL customers to order directly from the ST Web site. ST would ship directly to these customers. ST would pay $12 to WL for every Galaxy jersey purchased by one of WL’s customers. Comment qualitatively on how this offer would affect inventory management at WL. What factors should WL consider in deciding whether to accept ST’s proposal? 
3. 21-23. EOQ FOR A RETAILER. The Cloth Bonanza sells fabrics to a wide range of industrial and consumer users. One of the products it carries is denim cloth, used in the manufacture of jeans and carrying bags. The supplier for the denim cloth pays all incoming freight. No incoming inspection of the denim is necessary because the supplier has a track record of delivering high-quality merchandise. The purchasing officer of the Cloth Bonanza has collected the following information:

1. The purchasing lead time is 2 weeks. The Cloth Bonanza is open 250 days a year (50 weeks for 5 days a week).
   1. Required
   2. 1. Calculate the EOQ for denim cloth.
   3. 2. Calculate the number of orders that will be placed each year.
   4. 3. Calculate the reorder point for denim cloth.
2. 21-24. EOQ FOR A MANUFACTURER. Sk8 Company produces skateboards and purchases 20,000 units of a wheel bearing each year at a cost of $1 per unit. Sk8 requires a 15% annual rate of return on investment. In addition, the relevant carrying cost (for insurance, materials handling, breakage, etc.) is $0.17 per unit per year. The relevant ordering cost per purchase order is $38.40.
   1. Required
   2. 1. Calculate Sk8’s EOQ for the wheel bearing.
   3. 2. Calculate Sk8’s annual relevant ordering costs for the EOQ calculated in requirement 1.
   4. 3. Calculate Sk8’s annual relevant carrying costs for the EOQ calculated in requirement 1.
   5. 4. Assume that demand is uniform throughout the year and known with certainty so there is no need for safety stocks. The purchase-order lead time is half a month. Calculate Sk8’s reorder point for the wheel bearing.

21-25. SENSITIVITY OF EOQ TO CHANGES IN RELEVANT ORDERING AND CARRYING COSTS, COST OF PREDICTION ERROR. Alpha Company’s annual demand for its only product, XT-590, is 10,000 units. Alpha is currently analyzing possible combinations of relevant carrying cost per unit per year and relevant ordering cost per purchase order, depending on the company’s choice of supplier and average levels of inventory. This table presents three possible combinations of carrying and ordering costs.

1. Required

1. For each of the relevant ordering and carrying-cost alternatives, determine (a) EOQ and (b) annual relevant total costs.

2. How does your answer to requirement 1 give insight into the impact of changes in relevant ordering and carrying costs on EOQ and annual relevant total costs? Explain briefly.

3. Suppose the relevant carrying cost per unit per year was $20 and the relevant ordering cost per purchase order was $200. Suppose further that Alpha calculates EOQ after incorrectly estimating relevant carrying cost per unit per year to be $10 and relevant ordering cost per purchase order to be $400. Calculate the annual relevant total costs of Alpha’s EOQ decision. Compare this cost to the annual relevant total costs that Alpha would have incurred if it had correctly estimated the relevant carrying cost per unit per year of $20 and the relevant ordering cost per purchase order of $200 that you have already calculated in requirement 1. Calculate and comment on the cost of the prediction error.

1. 21-26. JIT PRODUCTION, RELEVANT BENEFITS, RELEVANT COSTS. The Knot manufactures men’s neckwear at its Spartanburg plant. The Knot is considering implementing a JIT production system. The following are the estimated costs and benefits of JIT production:
   1. a. Additional annual tooling costs of $250,000.
   2. b. Average inventory would decline by 80% from the current level of $1,000,000.
   3. c. Insurance, space, materials-handling, and setup costs, which currently total $400,000 annually, would decline by 20%.
   4. d. The emphasis on quality inherent in JIT production would reduce rework costs by 25%. The Knot currently incurs $160,000 in annual rework costs.
   5. e. Improved product quality under JIT production would enable The Knot to raise the price of its product by $2 per unit. The Knot sells 100,000 units each year.
2. The Knot’s required rate of return on inventory investment is 15% per year.
3. Required 
   1. 1. Calculate the net benefit or cost to The Knot if it adopts JIT production at the Spartanburg plant.
   2. 2. What nonfinancial and qualitative factors should The Knot consider when making the decision to adopt JIT production?
   3. 3. Suppose The Knot implements JIT production at its Spartanburg plant. Give examples of performance measures The Knot could use to evaluate and control JIT production. What would be the benefit of The Knot implementing an enterprise resource planning (ERP) system?
4. 21-27. BACKFLUSH COSTING, TWO TRIGGER POINTS, INCENTIVES. Raymore, a unit of Outdoor UnPlugged, manufactures a line of electric, cordless, lawn mowers. Senior management of Outdoor UnPlugged has noticed that Raymore has been producing more lawn mowers than it has been selling, and that the unit’s inventory has been steadily increasing. Senior management of Outdoor UnPlugged suspects that the bonus plan in place for the head of Raymore is behind this practice. Senior management of Outdoor UnPlugged is contemplating to switch from the current sequential tracking to a backflush costing system in order to stop the overproduction at Raymore. Specifically, senior management of Outdoor UnPlugged is considering a backflush costing system with the following two trigger points:
   1. • Purchase of direct materials
   2. • Sale of finished goods
5. Each mower takes 2 hours to assemble. There are no beginning inventories of materials or finished goods and no beginning or ending work-in-process inventories. The following data are for Raymore for March 2020:

1. Raymore records direct materials purchased and conversion costs incurred at actual costs. It has no direct materials variances. When finished goods are sold, the backflush costing system “pulls through” standard direct materials cost ($90 per unit) and standard conversion cost ($52 per unit). Raymore produced 17,000 finished units in March 2020 and sold 16,800 units. The actual direct materials cost per unit in March 2020 was $90, and the actual conversion cost per unit was $53. Any under- or overallocated conversion costs are written off monthly to Cost of Goods Sold.
   1. Required
   2. 1. Following Exhibit 21-8, prepare summary journal entries for March 2020 and post the entries to applicable T-accounts for both methods the current sequential tracking and the backflush costing that senior management of Outdoor UnPlugged is considering.
   3. 2. Refer to your answer in requirement 1. How is operating income going to differ under backflush costing compared to the current sequential tracking?
   4. 3. Do you think that switching to the backflush costing system is going to accomplish the goal of Outdoor UnPlugged’s senior management to stop the overproduction at Raymore?
2. 21-28. BACKFLUSH COSTING, TWO TRIGGER POINTS, OPERATING INCOME (CONTINUATION OF 21-27). Refer to Exercise 21-27. Jose, the unit manager of Raymore, is concerned that switching to the backflush costing system will lower the operating income of his unit. The senior management at Outdoor UnPlugged tells Jose that this will only be the case if the standard costs continue to be imprecise estimates of actual costs and that income will remain the same under the proposed backflush costing system if his team can better estimate standard costs.
   1. Required
   2. 1. Assume that Jose correctly estimates the standard conversion costs to be $53 and that conversion costs incurred and conversion costs allocated are both equal to $901,000; otherwise assume the same facts as in 21-27. Following Exhibit 21-8 prepare summary journal entries for March 2020 and post the entries to applicable T-accounts for both methods the current sequential tracking and the backflush costing that senior management of Outdoor UnPlugged is considering.
   3. 2. Is the claim of the senior management at Outdoor UnPlugged correct that Raymore’s operating income will remain the same under the proposed backflush costing system as long as the standard costs are estimated correctly?
3. 21-29. BACKFLUSH COSTING. Silicon Valley Computer (SVC), the producer of keyboards for personal computers, which is discussed in the chapter, is a subsidiary of El Camino Corporation. Each year, headquarters of El Camino provides a capital budget to each of their subsidiaries, the amount of which is determined by the size of the subsidiary’s balance sheet. The senior management of SVC is considering to simplify their accounting and to move to one of the backflush costing systems in Exhibits 21-7, 21-8, or 21-9. 
4. Required
5. Refer to exhibits 21-7, 21-8, and 21-9. Which of the backflush costing systems should the senior management of SVC choose if they want to maximize the capital budget that they receive from headquarters? Show your calculations.

Problems

1. 21-30. EOQ, UNCERTAINTY, SAFETY STOCK, REORDER POINT. Maynard Shoe Co. produces and sells an excellent-quality walking shoe. After production, the shoes are distributed to 20 warehouses around the country. Each warehouse services approximately 100 stores in its region. Maynard uses an EOQ model to determine the number of pairs of shoes to order for each warehouse from the factory. Annual demand for warehouse OR2 is approximately 132,000 pairs of shoes. The ordering cost is $264 per order. The annual carrying cost of a pair of shoes is $2.50 per pair.
   1. Required
   2. 1. Use the EOQ model to determine the optimal number of pairs of shoes per order.
   3. 2. Assume each month consists of approximately 4 weeks. If it takes 1 week to receive an order, at what point should warehouse OR2 reorder shoes?
   4. 3. Although OR2’s average weekly demand is 2,750 pairs of shoes $(\text{132,000}÷12\hspace{0.17em}\text{months}÷4\hspace{0.17em}\text{weeks}),$ demand each week may vary with the following probability distribution:

1. If a store wants shoes and OR2 has none in stock, OR2 can “rush” them to the store at an additional cost of $4 per pair. How much safety stock should warehouse OR2 hold? How will this affect the reorder point and reorder quantity?
2. 21-31. EOQ, UNCERTAINTY, SAFETY STOCK, REORDER POINT. Phillips Corporation is a major manufacturer of food processors. It purchases motors from Viking Corporation. Annual demand is 52,000 motors per year or 1,000 motors per week. The ordering cost is $360 per order. The annual carrying cost is $6.50 per motor. It currently takes 2 weeks to supply an order to the assembly plant.
   1. Required
   2. 1. What is the optimal number of motors that Phillips’ managers should order according to the EOQ model?
   3. 2. At what point should managers reorder the motors, assuming that both demand and purchase-order lead time are known with certainty?
   4. 3. Now assume that demand can vary during the 2-week purchase-order lead time. The following table shows the probability distribution of various demand levels:

1. If Phillips runs out of stock, it would have to rush order the motors at an additional cost of $5 per motor. How much safety stock should the assembly plant hold? How will this affect the reorder point and reorder quantity?
2. 21-32. MRP, EOQ, AND JIT. Gadgets Galore Corp. produces J-Pods, music players that can download thousands of songs. Gadgets Galore forecasts that demand in 2020 will be 22,800 J-Pods. The variable production cost of each J-Pod is $52. In its MRP system, due to the large $19,000 cost per setup, Gadgets Galore plans to produce J-Pods once a month in batches of 1,900 units. The carrying cost of a unit in inventory is $15 per year.
   1. Required
   2. 1. Using the MRP system, what is the annual cost of producing and carrying J-Pods in inventory? (Assume that, on average, half of the units produced in a month are in inventory.)
   3. 2. A new manager at Gadgets Galore has suggested that the company use the EOQ model to determine the optimal batch size to produce. (To use the EOQ model, Gadgets Galore needs to treat the setup cost in the same way it would treat ordering cost in a traditional EOQ model.) Determine the optimal batch size and number of batches. Round up the number of batches to the nearest whole number. What would be the annual cost of producing and carrying J-Pods in inventory if it uses the optimal batch size? Compare this cost to the cost calculated in requirement 1. Comment briefly.
   4. 3. Gadgets Galore is also considering switching from its MRP system to a JIT system. This will result in producing J-Pods in batch sizes of 300 J-Pods and will reduce obsolescence, improve quality, and result in a higher selling price. Gadgets Galore will reduce setup time and setup cost. The new setup cost will be $200 per setup. What is the annual cost of producing and carrying J-Pods in inventory under the JIT system?
   5. 4. Compare the models analyzed in the previous parts of the problem. What are the advantages and disadvantages of each?
3. 21-33. EFFECT OF MANAGEMENT EVALUATION CRITERIA ON EOQ MODEL. Rugged Outfitters purchases one model of mountain bike at a wholesale cost of $520 per unit and resells it to end consumers. The annual demand for the company’s product is 49,000 units. Ordering costs are $500 per order and carrying costs are $100 per bike per year, including $40 opportunity cost of holding inventory.
   1. Required
   2. 1. Compute the optimal order quantity using the EOQ model.
   3. 2. Compute (a) the number of orders per year and (b) the annual relevant total cost of ordering and carrying inventory.
   4. 3. Assume that when evaluating the manager, the company excludes the opportunity cost of carrying inventory. If the manager makes the EOQ decision excluding the opportunity cost of carrying inventory, the relevant carrying cost would be $60, not $100. How would this affect the EOQ amount and the actual annual relevant cost of ordering and carrying inventory?
   5. 4. What is the cost impact on the company of excluding the opportunity cost of carrying inventory when making EOQ decisions? Why do you think the company currently excludes the opportunity costs of carrying inventory when evaluating the manager’s performance? What could the company do to encourage the manager to make decisions more congruent with the goal of reducing total inventory costs?

1. 21-34. JIT PURCHASING, RELEVANT BENEFITS, RELEVANT COSTS. (CMA, adapted) The Gibson Corporation is a manufacturing company that uses automatic stamping machines to manufacture garage doors from rolled sheets of raw steel. Gibson’s inventory of raw steel averages $600,000. Juan Sanchez, president of Gibson, and Jane Anderson, Gibson’s controller, are concerned about the costs of carrying inventory. The steel supplier is willing to supply steel in smaller lots at no additional charge. Anderson identifies the following effects of adopting a JIT inventory program to virtually eliminate steel inventory:
   1. • Without scheduling any overtime, lost sales due to stockouts would increase by 700 units per year. However, by incurring overtime premiums of $90,000 per year, the increase in lost sales could be reduced to 300 units per year. This would be the maximum amount of overtime that would be feasible for Gibson. 
   2.  • Two warehouses currently used for rolled steel storage would no longer be needed. Gibson rents one warehouse from another company under a cancelable leasing arrangement at an annual cost of $80,000. The other warehouse is owned by Gibson and contains 20,000 square feet. Three-fourths of the space in the owned warehouse could be rented for $2.50 per square foot per year. Insurance and property tax costs totaling $16,000 per year would be eliminated. 
2. Gibson’s required rate of return on investment is 15% per year. Gibson’s budgeted income statement for the year ending December 31, 2020, (in thousands) is as follows:

1. Required

1. Calculate the estimated dollar savings (loss) for the Gibson Corporation that would result in 2020 from the adoption of JIT purchasing.

2. Identify and explain other factors that Gibson should consider before deciding whether to adopt JIT purchasing.

1. 21-35. SUPPLY-CHAIN EFFECTS ON TOTAL RELEVANT INVENTORY COST. Peach Co. outsources the production of motherboards for its computers. It is currently deciding which of two suppliers to use: Alpha or Beta. Due to differences in the product failure rates in the two companies, 5% of motherboards purchased from Alpha will be inspected and 25% of motherboards purchased from Beta will be inspected. The following data refer to costs associated with Alpha and Beta:

1. Required

1. What is the relevant cost of purchasing from Alpha and Beta?

2. What factors other than cost should Peach consider?

1. 21-36. SUPPLY-CHAIN EFFECTS ON TOTAL RELEVANT INVENTORY COST. Couture Jeans orders high-quality denim fabric from two different suppliers: Designer Fabrics and Cannon Cotton. Couture would like to use only one of the suppliers in the future. Due to variations in quality, Couture would need to inspect 20% of Designer’s 30-yard bolts (rolls) and 30% of Cannon’s. The following data refer to costs associated with the two suppliers.

1. Required

1. What is the relevant cost of purchasing from Designer Fabrics and Cannon Cotton?

2. What factors other than cost should Couture Jeans consider?

1. 21-37. BACKFLUSH COSTING AND JIT PRODUCTION. The Rippel Corporation manufactures electrical meters. For August, there were no beginning inventories of direct materials and no beginning or ending work in process. Rippel uses a JIT production system and backflush costing with three trigger points for making entries in the accounting system:
   1. • Purchase of direct materials 
   2. • Completion of good finished units of product 
   3. • Sale of finished goods 
2. Rippel’s August standard cost per meter is direct materials, $23, and conversion cost, $17. Rippel has no direct materials variances. The following data apply to August manufacturing:

1. Required

1. Prepare summary journal entries for August (without disposing of under- or overallocated conversion costs).

2. Post the entries in requirement 1 to T-accounts for Materials and In-Process Inventory Control, ­Finished Goods Control, Conversion Costs Control, Conversion Costs Allocated, and Cost of Goods Sold.

1. 21-38. BACKFLUSH, TWO TRIGGER POINTS, MATERIALS PURCHASE AND SALE (CONTINUATION OF 21-37). Assume the same facts for Rippel Corporation as in Problem 21-37, except that now assume Rippel uses a JIT production system and backflush costing with two trigger points for making entries in the accounting system:
   1. • Purchase of direct materials 
   2. • Sale of finished goods 
2. The inventory account is confined solely to direct materials, whether these materials are in a storeroom, in work in process, or in finished goods. No conversion costs are inventoried. They are allocated to the units sold at standard costs. Any under- or overallocated conversion costs are written off monthly to Cost of Goods Sold.
   1. Required
   2. 1. Prepare summary journal entries for August, including the disposition of under- or overallocated ­conversion costs.
   3. 2. Post the entries in requirement 1 to T-accounts for inventory Control, Conversion Costs Control, Conversion Costs Allocated, and Cost of Goods Sold.
3. 21-39. BACKFLUSH, TWO TRIGGER POINTS, COMPLETION OF PRODUCTION AND SALE (CONTINUATION OF 21-37). Assume the same facts for Rippel Corporation as in Problem 21-37, except that now assume Rippel uses a JIT production system and backflush costing with two trigger points for making entries in the accounting system:
   1. • Completion of good finished units of product
   2. • Sale of finished goods
4. The inventory account is confined solely to finished goods. Any under- or overallocated conversion costs are written off monthly to Cost of Goods Sold.
   1. Required
   2. 1. Prepare summary journal entries for August, including the disposition of under- or overallocated ­conversion costs.
   3. 2. Post the entries in requirement 1 to T-accounts for Finished Goods Control, Conversion Costs Control, Conversion Costs Allocated, and Cost of Goods Sold.

1. 21-40. LEAN ACCOUNTING. Flight Security Devices (FSD) has introduced a just-in-time production process and is considering adopting lean accounting principles to support its new production philosophy. The company has two product lines: Mechanical Devices and Electronic Devices. Two individual products are made in each line. Product-line manufacturing overhead costs are traced directly to product lines and then allocated to the two individual products in each line. The company’s traditional cost accounting system allocates all plant-level facility costs and some corporate overhead costs to individual products. The latest accounting report using traditional cost accounting methods included the following information (in thousands of dollars):

1. FSD has determined that each of the two product lines represents a distinct value stream. It has also determined that out of the $\mathrm{\$}\text{165,000}\hspace{0.17em}(\mathrm{\$}\text{35,000}+\mathrm{\$}\text{45,000}+\mathrm{\$}\text{70,000}+\mathrm{\$}\text{15,000})$ plant-level facility costs, product A occupies 25% of the plant’s square footage, product B occupies 15%, product C occupies 25%, and product D occupies 25%. The remaining 10% of square footage is not being used. Finally, FSD has decided that in order to identify inefficiencies, direct material should be expensed in the period it is purchased, rather than when the material is used. According to purchasing records, direct material purchase costs during the period were as follows:

1. Required

1. What are the cost objects in FSD’s lean accounting system?

2. Compute operating income for the cost objects identified in requirement 1 using lean accounting principles. What would you compare this operating income against? Comment on your results.

1. 21-41. JIT PRODUCTION, RELEVANT BENEFITS, RELEVANT COSTS, ETHICS. Galveston Pump Corporation is considering implementing a JIT production system. The new system would reduce current average inventory levels of $2,000,000 by 75%, but it would require a much greater dependency on the company’s core suppliers for on-time deliveries and high-quality inputs. The company’s operations manager, Frank Griswold, is opposed to the idea of a new JIT system because he is concerned that the new system (1) will be too costly to manage; (2) will result in too many stockouts; and (3) will lead to the layoff of his employees, several of whom are currently managing inventory. He believes that these layoffs will affect the morale of his entire production department. The management accountant, Bonnie Barrett, is in favor of the new system because of its likely cost savings. Frank wants Bonnie to rework the numbers because he is concerned that top management will give more weight to financial factors and not give due consideration to nonfinancial factors such as employee morale. In addition to the reduction in inventory described previously, Bonnie has gathered the following information for the upcoming year regarding the JIT system:
   1. •  Annual insurance and warehousing costs for inventory would be reduced by 60% of the current budgeted level of $350,000. 
   2. • Payroll expenses for current inventory management staff would be reduced by 15% of the budgeted total of $600,000.
   3. • Additional annual costs for JIT system implementation and management, including personnel costs, would equal $220,000. 
   4. • The additional number of stockouts under the new JIT system is estimated to be 5% of the total number of shipments annually. Ten thousand shipments are budgeted for the upcoming year. Each stockout would result in an average additional cost of $250.
   5. • Galveston’s required rate of return on inventory investment is 10% per year.
      1. Required
      2. 1. From a financial perspective, should Galveston adopt the new JIT system?
      3. 2. Should Bonnie Barrett rework the numbers?
      4. 3. How should she manage Frank Griswold’s concerns?