Toy World

Case facts:

* Highly seasonal sales (80% of sales between August and Nov)

* Production is also seasonal

The Current (Seasonal) Production Plan

Cost and benefit of the seasonal production plan:

• Inventory

• Inventory is minimized and the funds necessary to finance inventory is minimized.

• Inventory risk is minimized.

• Costs

• Overtime premiums in high season (reduces profits)

• Difficulty in scheduling production runs & shorter production runs

• Fixed capital is underused part of the year and then run to capacity

• Seasonal financing requirements

• Primarily receivables financing during the collection lag after the months of peak sales (lag is 60 days)

• The firm stays comfortably within its current credit line (it is owing $752 thousands at the end of 1993, and the bank is willing to extend a credit line of up to $2 million in 1994)

• Cash balance stays at a minimum required to finance operations

Level Production Plan

• Benefit

o Eliminates overtime premiums

o Other direct labor costs savings

• Cost

o Higher inventory and handling cost

o Need to commit funds to finance inventory accumulation in the off season

Conclusion:

* The company will get a net income growth, but will have to borrow a lot. As it is mentioned in the case that the borrowing beyond 2 M is subjected to negotiation, there are chances that the cost wil increase heavily due to such borrowing.

* Due to level production, the sales demand should be predicted accurately and since the businees is highly competitive, it is not advice due to the changed demand. The huge inventory might be obsolete, resulting in loses.

* Net income with seasonal: 351 K.

* Net income with level: 517 K.

* The required financing exceeds the maximum credit available ($2 million) for all months in the period June-November.

* Maximum financing needed in September doubles the available credit

* Actually, most critical month is...