Toy World

Toy World, Inc. Case Analysis

Seth Roberts

Financial Policy

Executive Summary

Toy World, Inc. is a company that has been manufacturing toys for children since 1973. Since 1976, the company has enjoyed profitable operations. At the end of 1993, revenue and profit came close to $8 million and $270 thousand respectively. With Jack McClintock as president and Dan Hoffman as production manager, the two have tried to find a strategy to adjust operations to the volatility of the toy market. Sales in the toy market are seasonal, reaching peaks in the months of August through December, while remaining relatively flat during the remaining months of the year. This seasonality has affected the company’s production schedule. During the off season, inventory is low, skilled workers are underutilized, and machinery is left idle. When the busy season finally arrives, Toy World is forced to hire more workers, pay additional overtime wages, and operate at full capacity. Dan Hoffman sees inefficiencies in this schedule and proposes a level production plan that would eliminate overtime wages and fully utilize skilled workers. Under his plan, toys would be manufactured evenly every month, allowing inventory levels to build in the months leading up to the holidays. In addition to using cash, the company must also take on additional loans to compensate for the high inventory levels.   In an industry that has relatively low capital requirements, Hoffman’s strategy may increase overall profitability, but it jeopardizes the company’s liquidity.

1.    What factors could Mr. McClintock consider in deciding whether or not to adopt the level production plan?

The main factors Mr. McClintock should consider when deciding whether or not to adopt the level production plan comes down to the trade off between liquidity and profitability. Given the highly seasonal nature of the industry, producing goods ahead of time has strong risks associated with it. If management’s projections are...