Turun Telelaitos Oy manufactures cordless telephones. Turun Telelaitos is planning to implement a JIT production system, which requires annual tooling costs of €150000. Turun Telelaitos estimates that the following annual benefits would arise from JIT production.
a. Average stock will decline by €700000, from €900000 to €200000.
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 €350000 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.
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?