Earthmovers Corporation Produces Bucket Loader Assemblies for the Tractor Industry

Essay

Earthmovers Corporation produces bucket loader assemblies for the tractor industry.The product has a long-term life expectancy.Earthmovers,who has a traditional manufacturing and inventory system,is considering the installation of a just-in-time inventory system to improve its cost structure.After a full study by its manufacturing engineering team,industry JIT experts and the main vendors and suppliers of the components used to manufacture the bucket loader assemblies,Earthmovers has developed the following incremental cost-benefit relevant information:
- Earthmovers cost of investment capital hurdle rate is 15%.
- One-time cost to rearrange the shop floor to create the manufacturing cell workstations is $325 000.
- One-time cost to retrain the existing workforce for the JIT required skills is $160 000.
- Anticipated defect reduction is 40%.Currently there is a cost of quality defect assessment listed as
$200 000 per year.
- The setup time for each of the existing functions will be reduced by 67%.Currently the forecast for setup costs are $270 000 per year.
- Earthmovers will expect to save $200 000 per year in carrying costs as a result of having a lower inventory.
The suppliers will require a 15% premium over the current level of prices in order to position themselves to supply the material on a smaller and more frequent schedule.Currently the materials purchases are $200 000 per year.
Required:
Determine whether it is in the best interest of Earthmovers Corporation to install a JIT system.
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