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Company
Questions Answers
What does the company sell? All sorts of plastic toys for children
Rapid growth, profits each year since foundation.
How big is the company? expected 9m T/O (NP 293k)
Sales + very seasonal!
Customers Are sales seasonal or uniform? 80% of annual sales (USD) sold August thru
Are they cyclical or stable?
Customers: many or few? Large variety store chains and toy broker
Is production seasonal or uniform? Seasonal, following pattern of sales

On demand, based on customer orders

25 - 30% of manufacturing capacity Jan - J
Production + What kind of production is it; on demand or serial? August - Dec WF greatly expanded, overtime, equip
Operations 16h a day (165k overtime premiums in 199

Long or short production process? Short, no WIP. All runs begun were completed on th

Founded 1973 by Richards(deceased) & King,

Who's in charge? (production manager) hired in 1989 (recent graduat
Tech shool)
King: YES, Co founder
Mgt + Is he/she experienced? Lindop: Barely, he's got some experience (internship
Personnel plastics plant of a Chemical company

We don't know, all we know is that there's been p

Is he/she reliable as a person + manager? year since 1973, so we can infer he's goo

# of employees? N/A, greatly expands in 2º half of the yea

What are the competitive advantages of the Co.? Before
Strategy
Why does the customer buy from you?

Industry
Highly competitive (design and price competition)
New toys, (high margin) then commoditized by competition
(margin erosion)
Fragmented (at least 11 competitors)
Low barriers of entry: low K requirement, simple tech

High entrance of foreign, low cost toy manufacturers

Very volatile sales of some products, can vary up to 35% from

one year to the next. Short product lives
 Answers
All sorts of plastic toys for children
owth, profits each year since foundation. For 1991
expected 9m T/O (NP 293k)
very seasonal!
% of annual sales (USD) sold August thru Nov

Large variety store chains and toy brokers

Seasonal, following pattern of sales

On demand, based on customer orders

5 - 30% of manufacturing capacity Jan - Jul
ec WF greatly expanded, overtime, equipment used
6h a day (165k overtime premiums in 1990)

WIP. All runs begun were completed on the same day

ded 1973 by Richards(deceased) & King, Lindop

n manager) hired in 1989 (recent graduate prominent
Tech shool)
o founder
ely, he's got some experience (internship) in a
nt of a Chemical company

know, all we know is that there's been profits each

year since 1973, so we can infer he's good

N/A, greatly expands in 2º half of the year

Before
 Condensed IS
Year 1988 1989 1990
Net sales 5,198 5,950 7,433
COGS 3,586 4,284 5,203
Gross Profit 1,612 1,666 2,230
OPEX 1,270 1,549 1,860
EBIT 342 117 370
Tax 116 46 126
Net Profit 226 71 244

1990 Jan Feb

Net sales 7,433 108 126
COGS 5,203 76 88
Gross Profit 2,230 32 38
OPEX 1860 188 188
EBIT 370 - 156 - 150
Tax 126 -53 -51
Net Profit 244 - 103 - 99
-53.04

1990 Jan Feb

Cash 175 787 1,366
A/R 2,628 958 234
Inventory 530 530 530
C/A 3,333 2,275 2,130
PPE, net 1,070 1,070 1,070
Total Assets 4,403 3,345 3,200

A/P 255 33 38
Notes P. 680 - -
Accrued Tax 80 27 - 24
STD 50 50 50
C/L 1,065 110 64
LTD 400 400 400
O. Equity 2,938 2,835 2,736
L+OE 4,403 3,345 3,200
They seem to have issues collecting A/R; "company quoted terms of net 30 days, most customers took 60

Ratios
1988 1989
W/C = equity+LTD-FA,net

= cash needed for

ops+receivables+inventory-
NFO Payables
CFO = N.P. +depreciation

ROS = NP/sales 4.35% 1.19%

ROA = NP/Assets

ROE = N.P./equity

K intensity

GM =GP/Sales 31% 28%

OPEX % =OPEX/Sales 24% 26%

Sales
1990 1991 J Share
January 70 108 1%
February 88 126 1%
March 98 145 1%
April 90 125 1%
May 88 125 1%
June 95 125 1%
July 98 145 1%
August 1,173 1,458 16%
September 1,390 1,655 19%
October 1,620 1,925 22%
November 1,778 2,057 24%
December 850 1,006 11%
7,438 9,000 100%
Jan-July 8% 10%
Aug-Dec 92% 90%
Aug-Nov 80% 79%
IS
1991 (J - sn) 1991 (J - L) Assumptions + Observations
9,000 9,000 Projection = accurate
6,330 6,300 COGS will still be 70%
2,670 2,700
2,265 2,256 based on avg OPEX
406 444
113 151 Based on Projected N.P
293 293 Projection = accurate

1991 - J (sn production)

March April May June
145 125 125 125
101 87 87 88
44 38 38 37
188 188 188 188
- 144 - 150 - 150 - 151
-49 -51 -51 -51
- 95 - 99 - 99 - 100

Balance Sheet (sn production)

Mar April May Jun
1,110 924 794 587
271 270 250 250
530 530 530 530
1,911 1,724 1,574 1,367
1,070 1,070 1,070 1,070
2,981 2,794 2,644 2,437

43 37 37 38
- - - -
- 153 - 235 - 286 - 369
50 50 50 50
- 60 - 148 - 199 - 281
400 400 400 375
2,641 2,542 2,443 2,343
2,981 2,794 2,644 2,437
days, most customers took 60 days to pay => " How about the industry, is this +/- average?

Ratios
1990 1991 seasonal 1991 level interpretation
2,268

3,078

Better ROS under Level Production. The comp

more efficiently in terms of its operations
3.28% 3.26% production

Higher ROA under Level Production. They'll be

optimizing the capacity of their assets in gene
also with a more stable production, machinery
much from heavy use during peak se

8% 10% Level Production results in better ROE. Under

investment of the shareholders were able to
generating better level of sales

competitive market, stable GM occasional decr

30% 30% competition and margin erosion

Slight increase due to overtime salaries increase as s

25% 25% increase? Level production…

Key elements 1990

* 80% of the annual sales came from Aug-Nov
* Aug-Dec the WF was expanded and put on overtime (+165k USD)
* All equipment was utilized 16h / day during this period, as opposed to Jan-July where no more than 25-30% of the capacity w
* Production and sales (month) is equal
* Collection term is 60 days, while purchases 30 days (cash leaves quicker than it enters?)
* Existing Bank loan 680k, can be extended to 1.9m in 1991 at 11% rate
 1988 1989 1990 1991 (avg)
COGS 69% 72% 70% 70%
OPEX 24% 26% 25% 25%
Tax 34% 39% 34% 36% 28%
34%

n)
July Aug Sept Oct Nov Dec total
145 1458 1655 1925 2057 1006 9,000
102 1021 1158 1348 1440 704 6,300
43 437 497 577 617 302 2,700
188 188 188 188 188 188 2,256
- 145 249 309 389 429 114 444
-49 85 105 132 146 39 151
- 96 164 204 257 283 75 293

ction)
Jul Aug Sep Oct Nov Dec
428 175 175 175 175 175
270 1,603 3,113 3,580 3,982 3,063
530 530 530 530 530 530
1,228 2,308 3,818 4,285 4,687 3,768
1,070 1,070 1,070 1,070 1,070 1,070
2,298 3,378 4,888 5,355 5,757 4,838

44 438 496 577 617 302

- 437 1,611 1,508 1,541 880
- 419 - 334 - 260 - 128 18 25
50 50 50 50 50 50
- 325 591 1,897 2,007 2,226 1,257
375 375 375 375 375 350
2,248 2,412 2,616 2,973 3,156 3,231
2,298 3,378 4,888 5,355 5,757 4,838
 interpretation

Better ROS under Level Production. The company will grow

more efficiently in terms of its operations under level
production

Higher ROA under Level Production. They'll be more efficient in

optimizing the capacity of their assets in generation of sales,
also with a more stable production, machinery won't suffer as
much from heavy use during peak season

Level Production results in better ROE. Under level prod, the

investment of the shareholders were able to contribute in
generating better level of sales

competitive market, stable GM occasional decreases due to

competition and margin erosion

Slight increase due to overtime salaries increase as sales and demand

increase? Level production…

e no more than 25-30% of the capacity was utilized

How accurate is the projection of 293k NP? So far we've been paying
on avg 36% of Tax, and 293k NP imply only 28% of Tax…

Assumptions
-COGS 70% of sales
-OPEX equal across year
- Negative taxes due to Op loss
-Taxes = 34%

Assumptions
* Cash kept at a 175k minimum and included excess cash in months when company was out of debt
* 60 day collection period & 30 day payment period
* inventories maintained at Dec 1990 level for all 1991
* Equip purchases = dep expense
* LT debt is repaid at a rate of 25k each June and Dec
s out of debt
1) Factors tha Mr King should consider in deciding whether or not to adopt the level production plan?

Seasonal Production Level Produ

- Based on known demand (when sale occurs, production begins) - Monthly production is predetermined based
year

- Little inventory kept
- Higher COGS due to increase in overtime premiums (160-200k)
- Difficulties in recruiting WF and high training and quality control costs
Once they're trained and efficient, peak season is over and we start all over.
Potentially go to other competitiors with Level Production?
-Inventory = kept for longer period, thus highe
fluctuating level of inventory
- Lower COGS
- More stable and predictable WF needs and e
can be done during somewhat calmer periods

2) What savings would be involved?

=> We need to give a financial projection and take into consideration the industry background

3) Estimate amount of added funds required and the timing of the needs under level production. What im
 e level production plan?

Level Production

roduction is predetermined based on forecast at the beginning of the

= kept for longer period, thus higher storage and handling costs, also
level of inventory
GS

le and predictable WF needs and expenditures. Easier to recruit, traning

e during somewhat calmer periods

ustry background

er level production. What implications do their differences have for the risk assumed by the various parties?