Production Toy World
Change in Production Strategy for Toy World Inc. December 1993 - Toy World Incorporated is a manufacturer of plastic toys for children. Its products include toy cars, construction equipment rockets, spaceships and satellites, musical instrument, animals, robots, and action figures. Products produced are available in a wide range of designs, colors, and sizes. The market served is very competitive with at least 11 competitors competing with the same product offering and price, in an industry with relatively low barriers to entry. The immediate situation is whether to move from seasonal production to level production.Toy World is debating the merits of changing from a production method whereby toys are produced as the orders come in i.e. seasonal production, versus a method in which toys are produced year round at a level manner. In order to evaluate both methods of production, management must consider the following in evaluating the best method that maximizes shareholder equity: -Pros Of Level Production Cons Of Level Production* Quality Control and scheduling will be easier. * Product obsolescence and shrinkage.
Debt-To-Equityseasonal = Liabilities / Assets = (1366+350)/5352 = 32%Debt-To-Equitylevel = Liabilities / Assets = (1118+350)/5352 = 41%The Debt-To-Equity ratio tells me that the company will be financed by creditors an extra 9% under level production. has to exceed their borrowing capacity of $2M, and increase it to $4M for the lean months just to pay for holding inventory, a matter that would need to be negotiated with the bank. 55This ratio tells me that working under level production Toy World can service their debt better than under seasonal production. Expenses = $210Pro Forma Balance Sheets Under Level Production, 1994 (thousands of dollars) 542. Since Toy World is a manufacturer of plastic toys with high obsolescence, due to the fads that occur in this industry, I would not feel comfortable producing toys in January through July, hoping to move them in the months prior to the holidays. * Seasonal production requires frequent setup changes, quality and packaging problems and typically machinery stands idle for seven-and-a-months, then gets run at full capacity for the remainder of the yearToy World has an excellent credit history and company policy was to retire debt within 30 days. Finally, a 23% increase of on the bottom line over '93 shows good growth over the period utilizing the less risky seasonal production method. Since I have two children of my own, I know I would never buy their Christmas presents in the January sales and hold them until December because I am fairly sure that what toys are in style today can easily become history tomorrow. X-Interest Earnedseasonal = EBIT / Interest = (533+95)/95 = 6. Conclusion:Based on the numbers it appears that utilizing level production methods Toy World Inc. Since this business is highly competitive, having good customer relationships would be extremely important. This strategy would appear to be highly risky in such a competitive industry with relatively low barriers to entry, unless sales forecasts were absolutely accurate. * Production scheduling would be easier under level production.
Common topics in this essay:
Dec Cash,
Total Net,
Toy World,
Net Inc/Sales,
World Incorporated,
January July,
Net Profit,
50 50,
Christmas January,
1176 1176,
World Inc,
50 50 50,
1176 1176 1176,
Training Seasonal,
200 200,
level production,
586 586,
586 586 586,
250 250,
$200 $200,
200 200 200,
$210 $210,
375 375,
400 400,
250 250 250,
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