Question

Nazaro’s Boot Company makes specialty boots for the rodeo circuit. On December 31, 2016, the company had (a) 300 pairs of boots in finished goods inventory and (b) 1,200 heels at a cost of \(8 each in raw materials inventory. During 2017, the company purchased 35,000 additional heels at \)8 each and manufactured 16,600 pairs of boots.

Required

1. Determine the unit and dollar amounts of raw materials inventory in heels at December 31, 2017.

Analysis Component

2. Write a half-page memorandum to the production manager explaining why a just-in-time inventory system for heels should be considered. Include the amount of working capital that can be reduced at December 31, 2017, if the ending heel raw material inventory is cut by half.

Short answer

1. Ending inventory:

In dollars amount:$24,000.

In units:3,000 units.

2. Memorandum

Date: XX/XX/XX

To: Production manager

From: Accountant

Subject: Use of Inventory system

The business entity must just-in-time inventory to avoid over-production and to improve the cash flow. If the business entity cuts the ending inventory of heel raw material, it can reduce the working capital by$12,000.

Step-by-step solution

Definition of Just-in-Time Inventory

The inventory management in which the business entity tries to manage as low as possible by ordering the supplies when required in the production process is known as just-in-time inventory.

Ending inventory in units and dollar amounts

Particular	Units	Per unit $	Amount $
Beginning inventory	1,200	$8	$9,600
Add: Purchased	35,000	$8	$280,000
Less: Heels used in manufacturing shoes	(33,200)	$8	($265,600)
Ending inventory	3,000		$24,000

Memorandum to production manager

The business entity must use a just-in-time inventory system for heels because this method will not lead to the over-production of finished goods. It will also improve the business entity's cash flow because its cash will not get tied to inventory.

If the business entity reduces its heels ending inventory to 50%, then it will reduce its working capital as follow:

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