General Studies · Just In Time System
Mega-Tech Electronics Ltd. implemented a Just-in-Time (JIT) system on Jan 1, 2025. Before implementation, the annual inventory holding cost rate was 15%, the raw material inventory value was Rs. 40,00,000, the WIP inventory value was Rs. 20,00,000, and the defect rate was 3%. After 6 months, raw materials reduced by 75%, WIP reduced by 50%, the defect rate remained at 3%, and production cost stayed stable. Which statement most accurately reflects the quantitative and operational impact in the first 6 months?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The annual inventory holding cost savings are Rs. 6,75,000, and the JIT system is fully successful because all inventory reduction targets were met.
- 2The annual inventory holding cost savings are Rs. 6,00,000, but the system faces a critical operational risk due to the unmitigated 3% defect rate in a low-buffer environment.✓
- 3The annual inventory holding cost savings are Rs. 9,00,000, and the system is successful since inventory reduction is the primary goal of JIT.
- 4The total inventory is reduced to Rs. 30,00,000, and the cost savings do not justify the supply chain risk posed by the defect rate.
Correct answer
The annual inventory holding cost savings are Rs. 6,00,000, but the system faces a critical operational risk due to the unmitigated 3% defect rate in a low-buffer environment.
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