Toy World

Financial Management
15 March 2011
Group G

Sameer Duggal
Charbel Abi Ghanem
Anne Gilheany
Alessandro Procaccini
Antonio Razetto
Chlo Tuot

Problem: Toy World is a profitable, rapidly growing company that is exploring ways to modify its current
seasonal production process in order to reduce inefficiencies in machinery usage, reduce spending on
overhead and labor costs, and generally increase its net profits in order to remain competitive in an
increasingly crowded market.
Analysis: Toy World has several strengths and challenges that are important to take into consideration:
Strengths
Toy World is a rapidly growing company that enjoys a positive relationship with its customers, as
evidenced by its continued excellent experience in collecting account receivables between 30 and 60 days.
Based on the profitability and stability of the company prior to 1993, the bank has offered a credit line of
up to 2 million USD. The company is able to accurately forecast sales of its merchandise for the coming
12 months; forecasted sales for 1994 are 2 million more than those achieved in 1993, largely due to new
product lines of toys. It is also important to note that Toy Worlds current production process has no
associated costs with storage and inventory, due to near equal monthly production and sales amounts.
Challenges
Toy World is facing several challenges related to its equipment usage and availability, leading to high
overhead costs. Seasonal production processes currently leave machinery idle for 7.5 months followed by
heavy usage, and inefficiencies exist due to frequent set up changes and scheduling confusions. Moreover,
forecasted production volumes for 1994 depict near full capacity of equipment usage. Toy World also
incurs high labor costs related to overtime wages, training of additional workers and quality control
measures, among other factors.
Conclusion: A modification of Toy Worlds production processes, from seasonal to even monthly
production, would result in an overall increase in net profits of 171,000 USD (see Exhibit 3). These
changes would lead to an increase in working capital requirements (see Exhibit 5), which will
consequently require an augmentation of the credit line offered to Toy World by the bank.
Recommendations:
We recommend that Toy Worlds production processes be evenly leveled throughout all 12 months of
1994 (see Exhibit 4), as the improved efficiency in machinery usage and lack of reliance on additional
workers during peak seasons will allow for significant cost savings (see Exhibit 3). To achieve this, Toy
World will need to request an increased line of credit from the bank (from 2 to 4 million USD see
Exhibit 2). Although significantly higher than the line of credit initially offered, the following arguments
can be presented to demonstrate Toy Worlds financial viabilities:
- Toy Worlds increased profits in 1994 will allow the company to be a better customer to the bank (debt
to equity for 1994 will change from 0.4 to 0.3, and ROE will increase from 10% to 14%)
- The security package offered (line of credit secured through increased account receivables and
inventory) is more than enough to cover the usage of 4 million (see Exhibit 6)
- The banks requirement of keeping the credit line off the books for 30 days is achieved in Toy Worlds
financial plan. Exhibit 2 shows that it remains unutilized for 60 days (January and February)
Moreover, we also recommend that Toy World increase its account payables cycle from 30 days to 40 days
in September to ensure the credit line for September remains under 4 million.

Exhibit 1

Exhibit 2

Exhibit 3

Exhibit 4

Exhibit 5

Exhibit 6