Just in time (JIT) Revision question (NBAA, B5, NOV 2018)

MARINGA Video Company sells a package of blank videotapes to its customers all over Tanzania.   It purchases videotapes from MAYUNGA Tapes company at TZS.140,000 a package.   MAYUNGA Tapes Company pays all freight to MARINGA Video Company.   No incoming inspection is necessary because MAYUNGA Tapes  Company has a  superb reputation for the delivery of quality merchandise.    The annual demand of  MARINGA  Video  Company is  13,000 packages.  MARINGA Video Company requires 15% annual return on investment. The purchase order lead time is two weeks.  The purchase order is passed through the internet and it costs TZS.2000 per order.   The relevant insurance and material handling cost is TZS.3,100 per package per year. MARINGA Video Company has to decide whether to shift to Just In Time (JIT) purchase.   MAYUNGA Tapes Company agrees to deliver 100 packages of videotapes 130 times per year (5 times every two weeks) instead of the existing delivery system of 1,000 packages 13 times a year with an additional amount of TZS.20  per package.  MARINGA Video Co. will incur no stock out under its current purchasing policy.   It is however estimated that MARINGA Video Co. will incur stock out the cost on 50 videotape packages under a JIT purchasing policy.  In the event of a stock out, MARINGA Video Co. has to rush order tape packages which costs TZS.4,000 per package.

ZAMOYO  Co. also supplies videotapes.    It agrees to supply the tapes to MARINGA at TZS.130,600 per package under the JIT delivery system.  If videotapes are purchased from ZAMOYO Co, relevant carrying cost would be TZS.3,000 per package against TZS.3,100 in case of purchasing from MAYUNGA Tapes Co. However, ZAMOYO Co. does not enjoy a reputation for quality.   MARINGA Video Co. anticipates the following negative aspects of purchasing tapes from ZAMOYO Co.:

  • To incur additional inspection costs of TZS.5 per package.  Average stock out of 360 tape packages per year would occur, largely resulting from late deliveries.  ZAMOYO Co. cannot rush order at short notice.  MARINGA Video Co. anticipates lost contribution margin per package of TZS.8,000 from stock out.
  • The customer would likely return 2% of all packages due to the poor quality of the tapes and to handle this return,  an additional  cost  of  TZS.25,000  per package will be incurred.

REQUIRED:

  • Evaluate and comment on whether MARINGA Video Company should implement the JIT purchasing system.                                                  
  • Evaluate and comment on whether MARINGA Video Co. should place an order to ZAMOYO Co.                                                                  
  • How does the JIT approach help in improving an organization’s profitability?

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