Question

Hudson, Inc., is considering a change from a traditional purchasing system to a just-in- time purchasing system. What has probably happened to Hudson's cost per purchase order and inventory unit storage cost to prompt the company to consider such a change?

A. Purchase-order cost is increasing and unit storage cost is increasing.
B. Purchase-order cost is increasing and unit storage cost is decreasing.
C. Purchase-order cost is decreasing and unit storage cost is increasing.
D. Purchase-order cost is decreasing and unit storage cost is decreasing.
E. Both of these costs are relatively stable in amount.

Answer 1

Hudson, Inc. might opt for a JIT purchasing system due to increasing costs in both purchase orders and storage, which is typically indicative of rising input costs and wages leading to higher overall prices.

Step-by-step explanation:

Hudson, Inc. is considering shifting to a just-in-time (JIT) purchasing system probably because of a change in its cost structure. If the company is considering such a move, it is likely that the cost per purchase order and inventory unit storage cost are both increasing. This can happen when the company faces rising input costs, including higher prices for materials and increasing wages, which would lead to a rise in the equilibrium price as described in scenario (b) of the provided reference material.

With the just-in-time system, the company could decrease the inventory it holds, thus reducing storage costs and potentially reducing the number of purchase orders, should they be able to order more frequently but in smaller quantities that align closely with production needs. This situation corresponds with option A: Purchase-order cost is increasing and unit storage cost is increasing.