Toy World

Harvard Business School Case #295-073

Case Software #XLS086

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By,
Group 8
Neha Khedkar
Anil Kumar
Amrutha Miskin
Manisha Toppo
Sangeeta Bori
Sankalp Tigga
Neha Singh
Nidhi Gupta
smitted in any form or
Table A Condensed Income Statements, 1991-1993 (thousands of dollars)

1991 1992 1993 1994(Projected)

Net sales $5,213 100% $6,167 100% $7,967 100% 10000 100%
Cost of goods sold 3,597 69% 4,440 72% 5,577 70% 7000 70%
Gross profit $1,616 31% $1,727 28% $2,390 30% 3000 30%
Operating expenses 1,199 23% 1,542 25% 1,912 24% 2400 24%
Interest expense 68 1% 75 1% 85 1% 95 1%
Interest income 20 0% 15 0% 16 0% 28 0%
Profit before taxes $369 7% $125 2% $409 5% 533 5%
Federal income taxes 125 2% 43 1% 139 2% 182 2%
Net profit $244 5% $82 1% $270 3% 351 4%

33.88% 34.40% 33.99%

Table B Balance Sheet at December 31, 1993 (thousands of dollars)

Cash $200
Accounts receivable 2,905
Inventory 586
Current assets $3,691
Plant and equipment, net 1,176
Total assets $4,867

Accounts payable $282

Notes payable, bank 752
Accrued taxesa 88
Long-term debt, current portion 50
Current liabilities $1,172
Long-term debt 400
Shareholders’ equity 3,295
Total liabilities and shareholders’ equity $4,867

a
The company was required to make estimated tax payments on the 15th of April, June,
September, and December. In 1993 it elected to base its estimated tax payments on the
previous year’s tax. The balance of $88,000 was due on March 15, 1994.
Table C Monthly Sales Data (thousands of dollars)

Sales Projected
1993 1994

January $64 $120

February 88 140
March 96 160
April 88 140
May 87 140
June 95 140

July 96 160
August 1,251 1,620
September 1,474 1,840
October 1,723 2,140
November 1,965 2,285
December 940 1,115

$7,967 $10,000
Exhibit 1 Pro Forma Balance Sheets Under Seasonal Production, 1994 (thousands of dollars)
Actual
Dec. 31, Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.
1993
Casha $200 $878 $1,526 $1,253 $1,054 $915 $696 $527 $200 $200 $200 $200 $200
Accounts receivableb 2,905 1,060 260 300 300 280 280 300 1,780 3,460 3,980 4,425 3,400
Inventoryc 586 586 586 586 586 586 586 586 586 586 586 586 586

Current assets $3,691 $2,524 $2,372 $2,139 $1,940 $1,781 $1,562 $1,413 $2,566 $4,246 $4,766 $5,211 $4,186
Net plant and equipmentd 1,176 1,176 1,176 1,176 1,176 1,176 1,176 1,176 1,176 1,176 1,176 1,176 1,176

Total assets $4,867 $3,700 $3,548 $3,315 $3,116 $2,957 $2,738 $2,589 $3,742 $5,422 $5,942 $6,387 $5,362

Accounts payablee $282 $36 $42 $48 $42 $42 $42 $48 $486 $552 $642 $686 $334
Notes payable, bankf 752 0 0 0 0 0 0 0 433 1,741 1,745 1,677 942
Accrued taxesg 88 31 (23) (162) (251) (305) (394) (448) (352) (271) (126) 33 40
Long-term debt, current portion 50 50 50 50 50 50 50 50 50 50 50 50 50

Current liabilities $1,172 $117 $69 ($64) ($159) ($213) ($302) ($350) $617 $2,072 $2,311 $2,446 $1,366
Long-term debth 400 400 400 400 400 400 375 375 375 375 375 375 350
Shareholders’ equity 3,295 3,183 3,079 2,979 2,875 2,770 2,665 2,564 2,750 2,975 3,256 3,566 3,646

Total liabilities and equity $4,867 $3,700 $3,548 $3,315 $3,116 $2,957 $2,738 $2,589 $3,742 $5,422 $5,942 $6,387 $5,362

a
Assumed maintenance of minimum $200,000 balance; includes excess cash in months when company is out of debt.
b
Assumed 60-day collection period.
c
Assumed inventories maintained at December 31, 1993 level for all of 1994.
Assumed equipment purchases equal to depreciation expense.
d

Assumed equal to 30% of the current month’s sales and related to material purchases of $3,000,000 for 1994 as against sales of $10 million. This represents a 30-day payment period.
e

Since inventories are level, purchases will follow seasonal production and sales pattern.
f
Plug figure.
g
Taxes payable on 1993 income are due on March 15, 1994. On April 15, June 15, September 15, and December 15, 1994, payments of 25% each of the estimated tax for 1994 are due. In
estimating its tax liability for 1994, the company has the option of using the prior year’s tax liability ($139,000) for its estimate and making any adjusting tax payments in 1995. Alternatively,
the company could estimate its 1994 tax liability directly. Toy World planned to use its prior year’s tax liability as its estimate and to pay $35,000 in April, June, September, and December.
h
To be repaid at the rate of $25,000 each June and December.
 $7,849
$19,825
$7,032

$34,706
$14,112
$0
$48,818

$3,000
$6,538
$2,228
$600

$7,910
$4,600
$36,308

$48,818
Exhibit 2 Pro Forma Income Statement Under Seasonal Production, 1994 (thousands of dollars)

Jan. Feb. Mar. Apr. May June July Aug.

Net sales $120 100% $140 100% $160 100% $140 100% $140 100% $140 100% $160 100% $1,620 100%
Cost of goods solda 84 70% 98 70% 112 70% 98 70% 98 70% 98 70% 112 70% 1,134 70%
Gross profit $36 30% $42 30% $48 30% $42 30% $42 30% $42 30% $48 30% $486 30%

Operating expensesb 200 167% 200 143% 200 125% 200 143% 200 143% 200 143% 200 125% 200 12%
Interest expense 7 6% 4 3% 4 3% 4 3% 4 3% 4 3% 3 2% 5 0%
Interest incomec 2 2% 4 3% 5 3% 4 3% 3 2% 3 2% 2 1% 1 0%

Profit (loss) before taxes ($169) -141% ($158) -113% ($151) -94% ($158) -113% ($159) -114% ($159) -114% ($153) -96% $282 17%
Income taxesd (57) -48% (54) -39% (51) -32% (54) -39% (54) -39% (54) -39% (52) -33% 96 6%

Net Profit ($112) -93% ($104) -74% ($100) -63% ($104) -74% ($105) -75% ($105) -75% ($101) -63% $186 11%

a
Assumed cost of goods sold equal to 70% sales.
b
Assumed to be same for each month throughout the year.
c
Toy World expected to earn a 4% annualized rate of return on average monthly cash balances.
d
Negative figures are tax credits from operating losses, and reduced accrued taxes shown on balance sheet. The federal tax rate on all earnings was 34%.
Federal Tax Rate 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 34%
Sept. Oct. Nov. Dec. Total

$1,840 100% $2,140 100% $2,285 100% $1,115 100% $10,000 100%
1,288 70% 1,498 70% 1,600 70% 780 70% 7,000 70%
$552 30% $642 30% $685 30% $335 30% $3,000 30%

200 11% 200 9% 200 9% 200 18% 2,400 24%

12 1% 17 1% 17 1% 14 1% 95 1%
1 0% 1 0% 1 0% 1 0% 28 0%

$341 19% $426 20% $469 21% $122 11% $533 5%

116 6% 145 7% 159 7% 42 4% 182 2%

$225 12% $281 13% $310 14% $80 7% $351 4%

0.3402 34% 0.3404 34% 0.34 0.34 0.34 0.34 0.34 0.34
Exhibit 2 Pro Forma Income Statement Under Seasonal Production, 1994 (thousands of dollars)

Jan. Feb. Mar. Apr. May June July Aug.

Net sales $120 100% $140 100% $160 100% $140 100% $140 100% $140 100% $160 100% $1,620
Cost of goods solda 78 65% 91 65% 104 65% 91 65% 91 65% 91 65% 104 65% 1055
Gross profit $42 35% $49 35% $56 35% $49 35% $49 35% $49 35% $56 35% $565

Operating expensesb 200 167% 200 143% 200 125% 200 143% 200 143% 200 143% 200 125% 200
Handling expensesb 9.583333 8% 9.5833 7% 9.58333 6% 9.58333 7% 9.58333 7% 9.5833 7% 9.5833 6% 9.5833
Interest expense 7 6% 4 3% 4 3% 4 3% 4 3% 4 3% 3 2% 5
Interest incomec 2 2% 4 3% 5 3% 4 3% 3 2% 3 2% 2 1% 1

Profit (loss) before taxes ($173) -144% ($161) -115% ($153) -95% ($161) -115% ($162) -116% ($162) -116% ($155) -97% $352
Income taxesd (59) -49% (55) -39% (52) -32% (55) -39% (55) -39% (55) -39% (53) -33% 120

Net Profit ($114) -95% ($106) -76% ($101) -63% ($106) -76% ($107) -76% ($107) -76% ($102) -64% $232

a
Assumed cost of goods sold equal to 65.1% sales.
b
Assumed to be same for each month throughout the year.
c
Toy World expected to earn a 4% annualized rate of return on average monthly cash balances.
d
Negative figures are tax credits from operating losses, and reduced accrued taxes shown on balance sheet. The federal tax rate on all earnings was 34%.
Federal Tax Rate 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34 0.34

9.5833 22083.3 18.75

 Sept. Oct. Nov. Dec. Total

100% $1,840 100% $2,140 100% $2,285 100% $1,115 100% $10,000 100%
65% 1198 65% 1393 65% 1488 65% 726 65% $6,510 65%
35% $642 35% $747 35% $797 35% $389 35% $3,490 35%

12% 200 11% 200 9% 200 9% 200 18% $2,400 24%

1% 9.5833 1% 9.5833 0% 9.5833 0% 9.5833 1% $115 1%
0% 12 1% 17 1% 17 1% 14 1% $95 1%
0% 1 0% 1 0% 1 0% 1 0% $28 0%

22% $422 23% $521 24% $572 25% $167 15% $908 9%
7% 143 8% 177 8% 194 9% 57 5% $309 3% 0.34

14% $278 15% $344 16% $377 17% $110 10% $599 6%

34% 0.34 34% 0.34 34% 0.34 0.34 0.34 0.34 0.34 0.34