Question

Question: Racer’s Edge makes specialty skates for the ice skating circuit. On December 31, 2016, the company had (a) 1,500 skates in finished goods inventory and (b) 2,500 blades at a cost of \(20 each in raw material inventory, During 2017, Racer’s Edge purchased 45,000 additional blades at \)20 each and manufactured 20,750 pairs of skates.

Required

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

Analysis component

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

Short answer

Answer

1. Ending inventory:

Units:6,000 units

In dollars:$120,000

1. Memorandum

Date: XX/XX/XX

To: Production manager

From: Accountant

Subject: Use of Inventory system

The business entity is advised to use the just-in-time inventory system for blades. This method will benefit the business entity by improving the cash flow and avoiding excess production. If the inventory is cut in half, the working capital can be reduced by$60,000.

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.

Unit and dollar amount of ending inventory of raw material

Particular	Units	Per unit	Total cost
Beginning raw material	2,500	$20	$50,000
Add: Purchase during the year	45,000	20	900,000
Less: used during the year 20,750 x 2	(41,500)	20	(830,000)
Ending inventory	6,000		$120,000

Use of just-in-time inventory  

The business entity must use the just-in-time inventory to improve the cash flow position and reduce the chances of over-production. When the ending inventory is cut-in-half, the working capital will be reduced by the following amount:

$$\begin{gathered} \text{Reductioninworkingcapital=}\frac{Endinginventory}{2} \\ =\frac{\$120,000}{2} \\ =\$60,000 \end{gathered}$$