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Just-in-time principles Warm Space Inc. manufactures electric space heaters. While the CEO, Gwen Willis, is visiting the production facility, the following conversation takes place with the plant manager, Tyra Chastain: Gwen: As I walk around the facility, I can't help noticing all the materials inventories. What's going on? Tyra: I have found our suppliers to be very unreliable in meeting their delivery commitments. Thus, I keep a lot of materials on hand so as to not risk running out and shutting down production. Gwen: Not only do I see a lot of materials inventory, but there also seems to be a lot of finished goods inventory' on hand. Why is this? Tyra: As you know, I am evaluated on maintaining a low cost per unit. The one way that I am able to reduce my unit costs is by producing as many space heaters as possible. This allows me to spread my fixed costs over a larger base. When orders are down, the excess production builds up as inventory, as we are seeing now. But don't worry—I'm really keeping our unit costs down this way. Gwen: I'm not so sure. It seems that this inventory must cost us something. Tyra: Not really. I'll eventually use the materials, and we'll eventually sell the finished goods. By keeping the plant busy, I'm using our plant assets wisely. This is reflected in the low unit costs that I'm able to maintain. If you were Gwen Willis, how would you respond to Tyra Chastain? What recommendations would you provide to Tyra Chastain?

BuyFind

Survey of Accounting (Accounting I)

8th Edition
Carl Warren
Publisher: Cengage Learning
ISBN: 9781305961883
BuyFind

Survey of Accounting (Accounting I)

8th Edition
Carl Warren
Publisher: Cengage Learning
ISBN: 9781305961883

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Chapter
Section
Chapter 10, Problem 10.6C
Textbook Problem

Just-in-time principles
Warm Space Inc. manufactures electric space heaters. While the CEO, Gwen Willis, is visiting the production facility, the following conversation takes place with the plant manager, Tyra Chastain:

Gwen: As I walk around the facility, I can't help noticing all the materials inventories. What's going on?
Tyra: I have found our suppliers to be very unreliable in meeting their delivery commitments. Thus, I keep a lot of materials on hand so as to not risk running out and shutting down
production.

Gwen: Not only do I see a lot of materials inventory, but there also seems to be a lot of finished goods inventory' on hand. Why is this?
Tyra: As you know, I am evaluated on maintaining a low cost per unit. The one way that I am able to reduce my unit costs is by producing as many space heaters as possible. This allows me to spread my fixed costs over a larger base. When orders are down, the excess production builds up as inventory, as we are seeing now. But don't worry—I'm really keeping our unit costs down this way. Gwen: I'm not so sure. It seems that this inventory must cost us something.
Tyra: Not really. I'll eventually use the materials, and we'll eventually sell the finished goods. By keeping the plant busy, I'm using our plant assets wisely. This is reflected in the low unit costs that I'm able to maintain.
If you were Gwen Willis, how would you respond to Tyra Chastain? What recommendations would you provide to Tyra Chastain?

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Chapter 10 Solutions

Survey of Accounting (Accounting I)
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