This problem comes from Managerial Accounting a Focus on Ethical Decision Making 5th edition, Jackson, Sawyer and Jenkins.You recently began work at Colt Kitchen Ltd. The company is a well-known distributor of gourmet foods. Like many similar companies, Colt Kitchen currently maintains a relatively large warehouse in which a wide variety of products are stored. Most other food wholesalers also maintain large warehouses, however, Sharon Oblinger, the company's president, is very concerned about the company's ability to maintain and sell the freshest products. She has also grown increasingly concerned about the company's cash management practices. She has accumulated the following inventory data:
- Spices $28,000
- Coffee and Tea 61.060
- Pasta 32,140
- Vegetables 108,460
- Health Supplements 84,700
- Dairy 46,975
- Meats 185,610
- Personal Products 71,440
- Household 88,200
- Per Care 15,920
Ken Martin, cofounder and chief strategist, is equally concerned about the company, but he believes that specialty food shops that sell the company's products expect to b e able to order items from Colt Kitchen and have them shipped immediately. In short, Ken thinks that maintaining an adequate inventory is crucial to the company's future. Sharon and Ken have set a meeting for late next week to decide on the company's adoption of a just-in-time inventory management system. Sharon is proposing that inventory be reduced by 80 percent and that warehouse employment be decreased by 30 percent. Currently, the 10 warehouse employees earn an average gross pay of $350 per week.
C. Assume that Colt Kitchen can invest cash that would otherwise be "tied up" in inventory. Calculate the potential interest income if the company were to receive an annual interest rate of 3.5 percent on the cash that would otherwise be invested in the inventory (represented by the 80 percent reduction).