Question

In an effort to improve its competitive position, Dallas Co. recently introduced a new inventory control system. Its management accountant assembled the following data regarding the recent change:

Item	Before new system	After new system
Production cycle time	50 days	40 days
Inventory level	$200,000	$120,000
Total sales	$1,800,000	$2,000,000
Estimated cost data, % of sales
Direct materials	35%	30%
Direct labor	20%	15%
Variable overhead	15%	10%
Fixed overhead	10%	5%

The company's inventory financing cost is estimated as 10% per year.

Required:

1. Estimate the net financial benefit (expressed in terms of operating income) that the company realized from the switch to a new inventory control system.
2. List four (4) non-financial benefits the company might expect as a result to its move to new inventory control system.
3. What are the primary expected costs of implementing a new inventory control system?

Answer 1

Answer 1: Net financial benefit due to switching to the new inventory control system-

Particulars	Before New System (A)	After New System (B)	Benefit (A-B)
Total Sales	1,800,000	2,000,000	2,00,000
Less: Variable Expenses
Direct Material	6,30,000	6,00,000	30,000
Direct Labour	3,60,000	3,00,000	60,000
Variable Overhead	2,70,000	2,00,000	70,000
Contribution	5,40,000	9,00,000	3,60,000
Less: Fixed Cost	1,80,000	1,00,000	80,000
Net Benefit	3,60,000	8,00,000	4,40,000

Answer 2: Non-financial benefits due to moving to the new inventory control system are as follows:-

1. Increased Information Transparency.
2. Improved Delivery Performance.
3. Accurate Planning.
4. Increased Customer Loyalty.

Answer 3: Primary expected costs of implementing a new inventory control system-

The primary expected cost of implementing new inventory control system is the inventory financing cost.