Case Analysis - Toy World

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

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

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

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

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