Pritchett Enterprises manufactures hiking and outdoor equipment. The company’s plant in western Colorado has recently seen dramatic changes in manufacturing…

Pritchett Enterprises manufactures hiking and outdoor equipment. The company’s plant in western Colorado has recently seen dramatic changes in manufacturing processes. Management is concerned that the current cost system no longer captures the impact of the diversity of activities involved in its production processes. As a result, management is evaluating whether activity-based costing may provide more accurate and meaningful cost data. The production environment includes the following primary activities and cost drivers:

The company has decided to implement just-in-time inventory management techniques. Using JIT will reduce the amount of inventory on hand at any point in time and save approximately $50,000 annually on inventory carrying costs. In addition, there will be 70 percent fewer purchase orders for inventory issued, but twice as many setups for production runs. The company will also be able to receive a 2 percent discount on raw materials purchases because of the long-term nature of the orders.
Overhead Cost Info Cost driver Driver Activity
Purchase orders $200000 # of orders 10,000
Receiving orders 25,000 # of orders 10,000
Setup cost 25,000 # of setups 5,000
Testing costs 48,000 # of tests 6,000
Machine maintenance 350000 # machine hours 10,000
Required:
A. If raw materials purchases are $1,000,000 per year (that is, the cost before the above mentioned changes are implemented), what quantitative impact will the change to JIT have on the overall costs for the company?
The impact would be total savings of $ ________.