We get monthly for purchases.
What implications do their differences have for the risk assumed by the various parties? Under the alternative production plans, the timing and amount of funding that Toy World will need to keep up with inventory projections significantly differs.
In addition to using cash, the company must also take on additional loans to compensate for the high inventory levels. If Toy World can manage a decent contract with the bank they should be able to stay profitable and payback the funds that they will have to borrow from the bank.
However, as it is mentioned in the case study income taxes for are due in March Also, the industry has relatively no barriers to entry so taking on more debt in this volatile industry to increase inventories would be risky as products have short lives and a relatively high rate of company failures.
We determined this number by dividing the annual cost of goods sold by To determine the interest income, we multiplied the average monthly cash balance by the 4 percent annualized return provided by management.However, we do realize Related Documents Essay Gg Toys Case St increase margins, need consider our we to drastically shiftingour production towards sfecialtydolts aie that earning large prnniumin priceoaer standard line. Sales in the toy market are seasonal, reaching peaks in the months of August through December, while remaining relatively flat during the remaining months of the year. However, as it is mentioned in the case study income taxes for are due in March It allows them to eliminate overtime premiums, as well as allows them to save on other direct labor costs. Sensitivity Analysis Given the inherent risks associated with producing toys significantly ahead of time, we decided to conduct a sensitivity analysis around this factor Exhibit D. During the off season, inventory is low, skilled workers are underutilized, and machinery is left idle. Excess of total liabilities over total assets is added to the minimum amount in order to balance sides of the balance sheet. However, this is slightly offset by the annual increase in storage and handling costs, which is accounted for in operating expenses. McClintock consider in deciding whether or not to adopt the level production plan? To determine the interest income, we multiplied the average monthly cash balance by the 4 percent annualized return provided by management. In a level production plan, management will have to begin producing for peak sales periods early on in the year, greatly increasing the risk of inaccurate projections. Credit terms are Net 30 meaning that this amount is due in 30 days. We get monthly for purchases. What factors could Mr.
Additionally, the company will incur extra costs of storing the inventory that will accumulate in the first half of the year. Under level production, the finished goods completed should be constant month over month.
Accounts receivable, net — Accounts Receivable are not affected by change in approach as in case of sales. Prepare the pro forma financial statements and estimate the external funding needs required.During the off season, inventory is low, skilled workers are underutilized, and machinery is left idle. It allows them to eliminate overtime premiums, as well as allows them to save on other direct labor costs. Production is calculated based on assumption that total yearly production equals total COGS for , in other words, what is produced is sold. How to cite this page Choose cite format:. Given the annual savings in overtime premiums as well as direct labor, cost of goods sold under level production would be reduced from a constant 70 percent of sales to If the toys ended up not being as popular as they forecasted, then the various parties would take on the risk of the rising inventories. Given the highly seasonal nature of the industry, producing goods ahead of time has strong risks associated with it. McClintock should consider when deciding whether or not to adopt the level production plan comes down to the trade off between liquidity and profitability. For example, in June, due to the lags of the day collection periods, strong funding will be needed to keep up with the level production.