Play Time Toy Co
Play Time Toy Company
I. Introduction
Background
Play Time Toy Company is a plastic toy manufacturer. It has experienced rapid growth since founding, recently expanding its operations to allow further growth. From 1973 until the early 1990's, the company specialized in seasonal manufacturing, producing in direct response to customer orders. However, in early 1991, the president of Play Time Toy Company, Jonathon King, was considering a change from seasonal to level production in the upcoming year.
Regardless of which method is used, the company's sales are seasonal with 80% of dollar volume sold between August and November. Under seasonal production, the cost of goods sold is 70% of sales. However, under level production, the cost of goods sold would slightly decrease to 61.16% of sales. With either production method, operating expenses will likely incur evenly throughout each month.
Under seasonal production, the company produces in response to customer orders. From January to August, sales are low; therefore, production runs at only 25-30% of capacity and the workforce is contracted. However, during the peak season, August through December, equipment is run at maximum capacity and the workforce is put on overtime, with premiums amounting to $165,000 annually.
Because of recent operation expansion, Play Time Toy Company has experienced a strained working capital position. For instance, the company's accounts receivables do not coincide with their account payables. The company allows 60 days to receive payment, but promptly retires their trade debt after only 30 days. These mismatched cash in- and outflows caused a strained cash position. In 1990, the year-end cash balance of $175,000 was considered the minimum cash needed for operations. During that year, the company took out a $680,000 loan, still outstanding at year-end. Their bank had agreed to extend a secured line of credit up to $1.9 million in 1991. Interest of 11% would
I. Introduction
Background
Play Time Toy Company is a plastic toy manufacturer. It has experienced rapid growth since founding, recently expanding its operations to allow further growth. From 1973 until the early 1990's, the company specialized in seasonal manufacturing, producing in direct response to customer orders. However, in early 1991, the president of Play Time Toy Company, Jonathon King, was considering a change from seasonal to level production in the upcoming year.
Regardless of which method is used, the company's sales are seasonal with 80% of dollar volume sold between August and November. Under seasonal production, the cost of goods sold is 70% of sales. However, under level production, the cost of goods sold would slightly decrease to 61.16% of sales. With either production method, operating expenses will likely incur evenly throughout each month.
Under seasonal production, the company produces in response to customer orders. From January to August, sales are low; therefore, production runs at only 25-30% of capacity and the workforce is contracted. However, during the peak season, August through December, equipment is run at maximum capacity and the workforce is put on overtime, with premiums amounting to $165,000 annually.
Because of recent operation expansion, Play Time Toy Company has experienced a strained working capital position. For instance, the company's accounts receivables do not coincide with their account payables. The company allows 60 days to receive payment, but promptly retires their trade debt after only 30 days. These mismatched cash in- and outflows caused a strained cash position. In 1990, the year-end cash balance of $175,000 was considered the minimum cash needed for operations. During that year, the company took out a $680,000 loan, still outstanding at year-end. Their bank had agreed to extend a secured line of credit up to $1.9 million in 1991. Interest of 11% would