Play Time Toy Co Is Expected to Take on $2.6m in Bank Notes

Recommendation

At this time, we agree with Mr. Lindop’s recommendation to shift from a seasonal production strategy to a level production strategy. Based on our projections, we expect this shift in strategy to increase our net income ($293 with seasonal production and $802 with level production) by $509 compared to seasonal production.

In order to capture this difference in net income, Play Time Toy Co is expected to take on $2.6m in bank notes, as compared to $1.6m in bank notes if it decides to remain with seasonal production. Beyond the boost in net income, Play Time Toy Co will also experience more efficiency in hiring and better quality control.

About Play Time Toy Co.

Play Time Toy Co was founded by Henry Richards (75% stakeholder) and Jonathan King (25% stakeholder) in 1973 using their savings. Unfortunately, Mr. Richards retired early due to health issues, and Mr. King subsequently hired Thomas Lindop.

Financially, the company has experienced rapid growth, despite the competitive landscape. Sales from 1990 were $7.4m and projected to be $9.0m in 1991, based on the current production strategy. The year-end cash balance in 1990 was $175,000, and the company has a loan outstanding of $680,000 with its bank, Bay Trust Company. The bank has expressed willingness to extend a credit line of up to $1.9m in 1991.

The current production strategy of the company is to produce an immediate response to customer orders. For a portion of the year, production and orders were minimal, but the first major orders for Christmas season come in around August; at that time, the company needs to ramp up its production and hire quickly, resulting in increased cost due to repeated set-up costs, scaling, and inefficiency. After one selling season at Play Time Toy Co., Mr. Lindop decided to propose the practice of level production, which recommends continuous, steady production throughout the year, rather than seasonal. The impact of the level production strategy would reduce wages and labor, while increasing operating expenses due to higher storage and handling costs.

Assumptions and Details

The proposed change to level monthly production comes with a list of assumed benefits. Overtime wages are expected to be reduced by $200,000. The more consistent production process