A change from seasonal to level manufacturing schedule of toys will transform the seasonal cycle of Toy World's working capital demands and lead to making the obtaining of new bank redit arrangements necessary. A redrafted account of a prior case.
Net Savings from Level Production
Pro Forma Balance Sheets Under Level Production, 1994
Pro Forma Income Statement Under Level Production, 1994
Balance Sheet Assumptions
Income Statement Assumptions
Inventory for the year 1994
Accrued Taxes for the year 1994
Liability Pattern Comparison
What factors could Mr. McClintock consider in deciding whether or not to adopt the level production plan?
What savings would be involved?
Prepare a financial forecast to estimate the company’s funding needs with level production (Prepare pro forma income statements and balance sheets (rather than a cash budget) to make this estimate. ). For simplicity assume that interest income and expense do not change with the switch to level production.
Compare the liabilities patterns feasible under the alternative production plans. What implications do their differences have for the risk assumed by the various parties?
What effect will shifting to level production have on the company’s need for a bank loan? How would you go about estimating the change in funds required and the timing of the needs under level production?
Do you think it is feasible for Toy World to switch to level production? How does the change in funding requirements affect the risk assumed by the various parties?
What do you think Mr. McClintock should do?