Toy World, Inc.

By Group 20:

Priyanka Azad – MS19A070

Madhu Jethani – MS19A072

Toy World, Inc.- Introduction
– 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.
1.Characteristics of Toy World, Inc.
–Operating Characteristics :

Production process was not very complex, the toys sets were processed from raw materials and formed
into desired shapes, assembled and packed in the same day .
No WIP at the end of the day.
Operation practice in response to customers order . During first seven months only 25-30% of
manufacturing capacity is used, wherein from Aug to Dec, their workforce greatly expanded and put on
overtime and all equipment used 16 hours a day in capacity with the orders received.
The Cost of goods sold had averaged 70% of sales.
The operating expenses were even throughout each month during the year.
Expanding the operations had resulted in a strained working capital.
Seasonal sales, over 80% of annual dollar volume was usually sold between Aug and November
Company’s receivable collection - a period of 60 days, instead of 30-day term.
Continued….
 Purchases on net 30-day terms were made weekly in amounts necessary for estimated production in the
coming week.
 It was the company’s policy to retire trade debt promptly as it came due.

– Competitive Characteristics :
 Post 1991, In Spite of the high competition Toy world, Inc. had experienced profitable operations each year
since 1976.

– Market Characteristics :
 Competitive pressures on smaller firms like Toy World had intensified due to influx of imported toys
produced by foreign toy manufacturers with low labour costs.
 Sales mainly made to large variety store chains and toy brokers.
2.How are currents assets
being financed by the
company
– Majorly from unsecured line of credit from banks
– Terms of credit :
– 9% interest p.a.
– Credit limit expected : $2 million.
– Negotiable beyond $2 million.
– Net Working capital as on Dec 31 1993 is $2,519,000.
– Company has sufficient resources and both long term($400,000) and short term
debt($752,000).
3.Estimate the amount of additional funds required
under level production. What is the timing,
magnitude and duration of its borrowing needs? How
certain are the forecasts?

– Additional funds are required in the month of March, April, May June, July August and
September.
– Magnitude of funds required differ monthly. In total, funds required amount to $3952.23
thousand .
– Certainty: The calculations are on the basis of figures given, for example estimated sales,
Interest rates, etc. If the actual figures differ from forecasted values given, the amount of
additional fund can will differ accordingly.
4. Evaluate the trade off between profitability vs. risk
and liquidity in the choice between level and
seasonal production. Should Toy world adopt level
production?
Risk 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 equipment's 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
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
Seasonal Production vs Level Production

– Seasonal Production – Level Production:

– Benefits: – Benefits
 Inventory is minimized and the funds necessary to finance inventory is  Eliminates overtime premiums
minimized.
 Other direct labor costs savings
 Inventory risk is minimized.
– Costs
– Costs:
 Higher inventory and handling cost
 Overtime premiums in high season (reduces profits)
 Need to commit funds to finance inventory
 Difficulty in scheduling production runs & shorter production runs accumulation in the off season.
 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
Sensitivity Analysis of Risk Involved- If Actual
sales are 35% less than forecasted sales
Liquidity and Profitability under level production Profitability: Savings from shifting to level production

Liquidity:
Higher liquidity maintenance required
Whenever working capital becomes less than
$200, the firm needs to finance it through short-
term bank credit, adding to interest expense.
Should the firm shift to level
Production?
– Yes, the firm should shift to level production
– Even in the worst case scenario(when sales are down by 35%) company has net savings of
$116 thousand
– Credit is allowed to the company by the banker as and when it needs and is less expense
– The company’s loan balance goes upto $3.94 million. Company estimates credit line
above $2 million is negotiable.
– Long term loan is availed by the company for financing its future capital expenditure
which has been postponed currently
– Expansion in the coming years is feasible provided company retains uniqueness in its
products.
5.As a banker, would you provide loan
to Toy World if it adopts level
production? Why or why not?
– Yes, as a banker, I would provide loan to Toy World if it adopts level production
– I would also propose long-term credit
– Inspite of competition in the market, Toy World has outperformed.
– The company has been growing steadily with expanding profits
– Company’s credit balances are above the 40% margins constantly from June –
Sep 1994.
– Even if accounts receivables have a lower margin requirement, credit balances
of the company are quite high from Aug-Oct 1994.
 Screenshots of Forecasted
Financial Statements of the
Company from Excel are
attached further
Pro-forma Income Statement Under Level Production
Pro-forma Cash Budget Under Level Production
Pro-forma Balance Sheet under Level Production
Thank you