21.20 JIT production, relevant benefits, relevant costs.(20 minutes)

Turun Telelaitos Oy manufactures cordless telephones. Turun Telelaitos is planning to implement a JIT production system, which requires annual tooling costs of €150 000. Turun Telelaitos estimates that the following annual benefits would arise from JIT production.

a Average stock will decline by €700 000, from €900 000 to €200 000.

b Insurance, space, materials handling and set-up costs, which currently total €200 000, would decline by 30%.

c The emphasis on quality inherent in JIT systems would reduce rework costs by 20%. Turun Telelaitos currently incurs €350 000 on rework.

d Better quality would enable Turun Telelaitos to raise the prices of its products by €3 per unit. Turun Telelaitos sells 30 000 units each year.

Turun Telelaitos’s required rate of return on stock investment is 12% per year.

Required

1 Calculate the net benefit or cost to Turun Telelaitos from implementing a JIT production system.

2 What other non-financial and qualitative factors should Turun Telelaitos consider before deciding on whether it should implement a JIT system?