Executive summary.
In this business case, a shift from seasonal to level monthly production of toys will change the seasonal cycle of Toys World's working capital needs and necessitate new bank credit arrangements.
It has to be analyzed the company's performance, forecast fund needs and make a recommendation. The case introduces the pattern of current assets and cash flows in a seasonal company and provide and elementary exercise in the construction of the pro forma financial statements and estimation of fund needs.
Toy World has been facing two basic issues, as follows:
- The first one is if it has to change to a level monthly production.
- The second area of concern is the financial arrangement with the bank.
These two points are analyzed in detail here in this paper.
Finally, I have suggested some recommendations for the issues that I have mentioned above. In reference to the first issue, it will be profitable for the company to change to level monthly production.
In reference to the second issue, Toy World has to get a bigger loan.
If the company follow this recommendations, it will obtain a profit of $ 531,000 that represents $180,000 more than with seasonal production
Background
Toy World, Inc is a manufacturer of plastic toys for children, founded in 1973 by David Dunton. In the past, the company's production schedules had always been highly seasonal, reflecting the seasonality of sales. Jack McClintock, president and part owner of this company, is considering a proposal to adopt level monthly production for the coming year.
Main Issues:
The two principal issues that has to be analyzed are:
.
1.Should Toy World change from seasonal production to level monthly production?
The first problem that has to be analyzed is if they have to adopt a policy of level monthly production, or if they have to continue with seasonal production. It has to be studied what are the opportunities and the risks for the company if they adopt the change.
2. Financial arrangement with the bank
If a level production is adopted, fund needs will change, and the company will have to renegotiate the agreements with its primary bank, City Trust Company.
Insights about the Main Issues
1. Should Toy World change from seasonal production to level monthly production?
With seasonal production there are many problems. Overtime premiums reduced profits, seasonal expansion and contraction of the work force resulted in recruiting difficulties and high training and quality control cost, etc.
An important indicator is that the company broke the budget for each department on monthly bases, since they had a variation of products and quality products. The reason why they did this stands to the point that the company produced products in two seasons, fall and spring. The fall products had a cost of $100 dollar per unit because of the more delicate product that required higher material cost, whereas the spring products had a cost of $60 dollars per unit as they needed less costly material. All in, these clarify the fact that they used monthly bases budget.
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Here are some recommendations for him to make changes. First, there are some strategies can be used in inventory control. The main problem of the inventory control is unable to respond with the changing demand. It is suggested the shops in Hogsmeadow Garden Centre to place more orders with smaller order batches each time. It is not necessary for the shops to place order in a fixed period of time, at the beginning of the season for Hogsmeadow Garden Centre. It is possible to place orders when the stocks reach minimal stock level, which means the minimal amount of safety inventory that are willing to keep on hand before replenishing the suppliers. (Colleen Rodericks, n.d.) This strategy is particularly beneficial for selling perishable goods, as it can reduce the inventory level of the shops. It enables the shops to lessen the problem of losing money by discounting and throwing away for the perished stocks. At the same time, it is important for the shops to use First-in-first-out (FIFO) method for perishable products. FIFO method means selling the oldest products first, and the selling the new purchased products later. (Colleen Rodericks, n.d.) It is crucial for products with limited-life, like plants. As the oldest products are supposed to perish earlier, it is better to sell them earlier so as to reduce throwing away the perished products. Reducing the order batches and using FIFO method can reduce the products to be thrown, the costs of inventory can be reduced and the profitability of Hogsmeadow Garden Centre can be
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