TOY WORLD, INC.

CASE ANALYSIS
 Toy World, Inc.
• Incorporated in 1974 as a partnership between David
Dunton (75% stake) and Jack McClintock (25% stake).

• Manufacturer of plastic toys for children

• Product groups include toy cars, trucks, construction

equipment, rockets, spaceships and satellites, musical
instruments, animals, robots and action figures.
 Plastic Toys Industry
• Highly competitive

• Large number of companies (many were short on capital

and management talent)

• No entry barrier (capital requirement was not large and

technology used was simple)

• Competition on the basis of design and price

• Short product lives and seasonal sales

THE MANAGEMENT QUESTION
• What is the impact of level production on the:

i. Extent of savings

ii. Quantum and Timing of funds requirement leading up

to a cash budget

iii. Risks assumed by different parties

 Company Specifics
• COGS to Sales ratio of 70% which remains constant
across months in a year (Seasonal Production)

• COGS to Sales ratio of 65.1% which remains constant

across months in a year (Level Production)

• A/C Receivable days – 60

• A/C Payable days - 30

 Pros and Cons of Level Monthly
Production
• Savings in overtime wage premium = $225,000

• Savings in additional direct labour = $265,000

• Higher shortage and handling costs = - $115,000

 Savings from Level Production

Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. TOTAL
Net Profit (Level Production) 116 108 103 109 112 115 113 220 267 333 371 106 521
Net Profit (Seasonal Production) 112 104 100 104 105 105 101 186 225 281 310 80 351
Monthly Savings 4 4 3 5 7 10 12 34 42 52 61 26 170

From the above table, it is evident that Level Production dominates

Chase Strategy of production

*Figures in red indicate negative values

 Quantum and Timing of Funds Required –
Cash Budget
CASH INFLOW Jan. Feb. Mar. Apr. May June July Aug. Sept.
Collection from Sales (assuming exact 60
$1,965
days AR Period)
$940 $120 $140 $160 $140 $140 $140 $160
Interest Income (After-tax) $0.44 $1.36 $1.77 $0.44 $0.44 $0.44 $0.44 $0.44 $0.44
TOTAL CASH INFLOW $1,965 $941 $122 $140 $160 $140 $140 $140 $160

CASH OUTFLOW
Payments (using AP period of 30 days) $282 $250 $250 $250 $250 $250 $250 $250 $250
Tax Payments $0 $0 $88 $35 $0 $35 $0 $0 $35
Long term Debt Repayment $3.34
Operating Expenses $210 $210 $210 $210 $210 $210 $210 $210 $210
Interest Expense $9.25 $3.61 $3.61 $4.48 $9.36 $13.87 $18.65 $23.38 $28.14
Wages $293 $293 $293 $293 $293 $293 $293 $293 $293
TOTAL CASH OUTFLOW $793 $756 $844 $791 $761 $804 $771 $775 $815

NET CASH INFLOW (OUTFLOW) $1,172 $186 $722 $651 $601 $664 $630 $635 $655

Whenever the ending cash is less than $200,000, a working capital loan is availed.

Beginning Cash $200 $620 $806 $200 $200 $200 $200 $200 $200
Ending Cash without Loan $1,372 $806 $84 $451 $401 $464 $430 $435 $455
Loan Availed (if required) $0 $0 $116.14 $651 $601 $664 $630 $635 $655
Loan Repayment $752 $0 $0 $0 $0 $0 $0 $0 $0
Ending Balance with Loan $620 $805.78 $200 $200 $200 $200 $200 $200 $200
Risks Assumed by Various Parties
• Toy World Inc:
• Risk of over-stocking resulting in liquidity problems
• Increased dependence on working capital loans
• Increased inventory costs
• Machines and equipments utilized in a uniform manner throughout
the year
• Reduction in dependence on overtime labour
• Increased risk of default to creditors

• Suppliers:
• Provides balanced and regular demand
• Risk of supply bottleneck reduced to a great extent
• Aids planning in production
• Greater chance of default
Risks Assumed by Various Parties
• Bankers:
• Greater risk of default on the part of lenders
• Adverse selection of lenders due to asymmetric information
• Increased quantum of working capital loan makes the bank’s
lending portfolio more risky
THANK YOU