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 bank’s
lending portfolio more risky
THANK YOU