Exercise 1 14A Using JIT to minimize waste and lost opportunity
Kim Weston, a teacher at Reid Middle School, is in charge of ordering the T shirts to be sold for the school’s annual fund raising project. The T shirts are printed with a special Reid School logo. In some years, the supply of T shirts has been insufficient to satisfy the number of sales orders. In other years, T shirts have been left over. Excess T shirts are normally donated to some charitable organization. T shirts cost the school $4 each and are normally sold for $6 each. Ms. Weston has decided to order 500 shirts.
Required
- If the school receives actual sales orders for 450 shirts, what amount of profit will the school earn? What is the cost of waste due to excess inventory?
- If the school receives actual sales orders for 550 shirts, what amount of profit will the school earn? What amount of opportunity cost will the school incur?
- Explain how a JIT inventory system could maximize profitability by eliminating waste and opportunity cost.