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 banks

lending portfolio more risky

THANK YOU