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Play Time Toy Company

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by

Joe Talampas

on 21 October 2013

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Transcript of Play Time Toy Company

Current Status of PTTC
80% of annual sales was sold between August and November
From August to December, the work force was expanded and put on overtime ($165,000)
All equipment was utilized 16 hours a day.
Production and sales amount monthly is equal
January to July, not more than 25-30% of the capacity was used.
Collection term is 60 while purchase term is 30 days.
There is an existing loan of $680,000 from Bay Trust Co. (can be extended to $1.9M in 1991 at 11% rate)
Company Background
Manufacturer of plastic toys for children (military toys, toy cars, trucks, construction equipment, guns, rockets, spaceships and satellites, musical instruments, animals, robots, and action figures)

1973 - founded by Henry Richards and Jonathan King
1974-1990 – the company specialized in seasonal manufacturing, producing in direct response to customer orders
1991 – the President was considering a change from season to level production in the upcoming year


Industry Background
The toy manufacturing company is a highly competitive business
Capital requirement is low and technology is relatively simple allowing new players to enter the industry easily
Design and price competition is intense
Entrants of foreign, low cost toy manufacturers is high.
The company will continue to reap the profit margins until the competition comes out with a similar products.
1991 Pro Forma Income Statements (Seasonal Production)

1991 Pro Forma Balance Sheets
(Seasonal Production)
Playtime Toy Company
Assumptions:
- Maintenance of cash kept at $175,000 minimum & included excess cash in months when company was out of debt.
- 60-day collection period
- Inventories maintained at Dec 1990, level for all of 1991
- Equip. purchases = depreciation expense
- 30-day payment period
- LT debt is repaid at a rate of $25K each June and December

Assumptions:
COGS is 70% of sales
Opex are equal throughout the year
Negative taxes are from operating loss. Federal tax rate is 34%
Purpose of the Case Study
The purpose of the PTTC case is to know whether employing Level Production will be more profitable than Seasonal Production given a financial projection and considering the industry background.

c) Level Production results in better ROE for the company. Under level production, the investment of the company’s shareholders were able to contribute in generating better level of sales.

d) With the assumption that the level of assets are the same with level production, Asset Turnover is equal for both methods of production. PPTC will have the same asset utilization rate for both methods. Excellent collection experience shall likewise be maintained.

e) Better inventory turnover with Seasonal Production at 11.89 times although there is no notable difference with Level Production’s 11.07 times inventory turnover. Better inventory turnover is calculated with seasonal production since inventories are kept at a minimum since production will only start once orders are placed.

f) Equal level of capital intensity with both methods of production. This also supports the equal level of asset turnover (for both methods).

Financial Ratio Analysis
Financial Assumption to the Level Production (1991)
Conclusion
In terms of profitability, employing Level Production could provide PPTC more benefits.
Other benefits of Level Production includes:
Recommendations
Determine the maximum capacity of the plant monthly.
Determine the storage capacity to be able to monitor the expense related to handling, storage and insurance of finished goods.
With Level Production, inventories are kept longer. Should the company experience difficulties in managing inventories, it is ideal that they keep/tie up with an experienced team to handle logistics.
Maintain an excellent collection scheme and monitor bank payables properly.
Maintain/Improve competitiveness by investing on research and development

Comparison of Seasonal and Level Production
Sales volume is proven to be reliable in the past, hence no changes

Overtime premiums and direct labor savings totalled $435,000.00

Handling/storage fee for the finished good is $100,000.00

The company was extended a credit line of $1.9M at 11%. PPTC availed the loan during the year.

The cost of goods sold is 65.16% of the total sales due to lower labor cost.


a) Better Return on Sales under Level Production. PPTC will grow more efficient in terms of its operations under level production.

b) Higher Return on Assets under Level Production. PPTC will be more efficient in terms of optimizing the capacity of its assets in generation of sales. Also, with the employment of level production, the machineries will not be ‘strained’ with instant heavy use during peak seasons (better performance of equipment).

Machineries are not overused (since production are predetermined based on past experiences)
Lesser recruiting and training difficulties
Quality of products are maintained
Lower cost of goods sold resulting to higher net income (at equal level of sales – versus seasonal production)
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