Explain two benefits to TT of using lean production methods.

Mark scheme

Marking points from the official mark scheme (May/June 2022). The mark or mark type is shown in brackets.

1. [1] Effect: Employees might be able to offer ways for small continuous improvements in the factory.
2. [3] Explanation for continuous improvement: May improve efficiency – reduce unit costs.
3. [1] Effect: Less inventory / less storage required for components.
4. [3] Explanation for less inventory: As JIT means components only ordered when required for production – reduces cost of storage of inventory / reduces amount of working capital required / may improve cash flow.
5. [1] Effect: Production of toys is quicker.
6. [3] Explanation for quicker production: As Kaizen means the factory layout is more effective – time is not wasted between manufacturing tasks.
7. [1] Effect: Defects/waste could be reduced or eliminated.
8. [3] Explanation for reduced defects: Reduces repair/returns cost - customer happy with quality – good reputation.
9. [1] Effect: The equipment used for flow production could be used in a better way.
10. [3] Explanation for better equipment use: Increased efficiency – lower unit costs.
11. [1] Effect: Some processes may be removed.
12. [3] Explanation for removed processes: Speeds up the production of toys – increases productivity.
13. [1] Effect: Improved health and safety of employees.
14. [3] Explanation for improved health/safety: As motion between jobs may be reduced - less time off work due to injury – more output produced.
15. [1] Accounts receivable has increased by $3m.
16. [1] The amount of cash held has increased by $2m.
17. [1] Amount of trade credit has increased by $1m.
18. [1] TT no longer has an overdraft.
19. [1] TT has taken out another bank loan for $5m.
20. [1] TT has current assets of $15m in 2022.
21. [1] TT has current liabilities of $5m in 2022.
22. [1] Current assets have increased by $5m.
23. [1] Current liabilities have remained the same.
24. [2] Accounts receivable has increased by $3m as more customers are allowed credit or existing customers are allowed a longer period to pay.
25. [2] The current ratio in 2022 is 3 / the current ratio has increased by 1 (from 2 in 2021 to 3 in 2022 if current assets are $15m and current liabilities are $5m).
26. [3] This current ratio is high as 2 would be more acceptable and indicates that TT may have too many of its assets in a liquid form.
27. [2] The acid test ratio in 2022 is 2 / the acid test ratio has also increased by 1 (from 1 in 2021 to 2 in 2022 if current assets less inventory are $10m and current liabilities are $5m).
28. [3] This acid test ratio is high as a ratio of 1 would be acceptable and indicates that assets are being held in non-income earning form.
29. [3] The liquidity seems to be sufficient to encourage banks to increase the loans to pay for the $10m expansion.
30. [4] Conclusion (Yes): TT is in a good financial position to expand as it has increased both liquidity ratios between 2021 and 2022. It is in a good position to be able to expand and fund some of the $10m for expansion out of its own funds. It does not look likely to have a liquidity problem as it expands.
31. [4] Conclusion (No): TT may not be in a good financial position to expand as it appears to have too much liquidity as the liquidity ratios could be considered to be too high. It has also increased its current liabilities by increasing its accounts payable and doubled its bank loans. These loans will have to be doubled again if TT chooses to finance the expansion from external sources. However, as TT is planning to expand then this may be a good financial position to fund this expansion with some internal sources of finance.