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Play Time Toy Company Case Solution & Answer

Play Time Toy Company Case Study Solution

Introduction

Play Time Toy Company is one of the widely known manufacturers of plastic toys for children, which was founded in 1973 by Henry Richards. The plastic toys industry has been very competitive and lucrative as well as populated by the large number of companies. The president of the toy manufacturing company is concerned about whether to adapt the level of production in the business, which is characterized by the highly seasonal sales, or not. The company is confronted with various issues, such as: balancing the cost saving, t inventory risk, determining an appropriate approach to the bank and estimating the seasonal financial needs.(Piper, 1991).

What factors should Mr. King consider in deciding whether to switch to level production?

Play Time Toy Company has been facing highly seasonal sales pattern. In the past, the company used seasonal schedule of production. Over 80 percent of the yearly dollar volume was usually sold between August and November. Mr. King is proposing a switch to the constant or level production schedule on account of the number of problems associated with the seasonal production of goods. Under the seasonal production; the company needs to expand the workforce and pay a large amount of overtime to them as the products required skilled labor for manufacturing. Additionally, the company also incurred a significant expense from training and hiring the new employees, because of the seasonal production. Furthermore, Mr. King should consider the recruiting difficulties and high quality control and training cost related with the seasonal production strategy.  Along with this, the decision to switch from seasonal to level production is backed by the higher cost of goods sold, due to an increase in the overtime premiums under the seasonal production.

In addition to this, given the highly seasonal nature of the industry; the manufacturing of products ahead of time would have a number of risks. In case of wrong projections by the management; the company would incur significant inventory write-offs or write-downs. Under the level production strategy; the company needs to consider various factors, such as: high cost of handling and storage and fluctuating levels of inventory, which tends to have implications over financing.  The inventory would be kept for longer period of time, which in turn would result in higher handling and storage cost and fluctuating inventory levels. Despite the factors, Mr. King needs to consider the benefits associated with level production, such as: reduced labor cost, better customer service, an improved quality control, low cost of goods sold and better cash flow.

What are the financial problems Playtime will face if it adopts level production? Prepare pro forma financial statements for the first year under the level production plan.

With core consideration over assessing and evaluating the financial implications of level production strategy; the pro forma financial statement is prepared for the first year under the level production plan. The sales volume of the company is proven to be reliable in the past, due to which the sales have remained constant under the level production plan. The cost of goods sold is broken into direct material (wages and material cost) and the overtime wages. The cost of goods sold is 65.16 percent of the sales volume, under the level production due to the lower cost of labor. Under the level production plan; the material and direct wages are similar to the “under the seasonal production plan”, but there wouldn’t be any overtime wages under the level production plan due to the fact the level production would eliminate the overtime premiums by $435000. Thus, the overtime premium and direct labor savings totals to $435000. Additionally, the increased handling and storage cost of $100000 is included in the inventory cost. Thus, the net profit of the company is projected to be $514 thousands of dollars, which is significantly higher as compared to the net profit under seasonal production plan of $293.04 thousands of dollar…………..

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