Essay about Toy World
In this business case, a shift from seasonal to level monthly production of toys will change the seasonal cycle of Toys World's working capital needs and necessitate new bank credit arrangements.
It has to be analyzed the company's performance, forecast fund needs and make a recommendation. The case introduces the pattern of current assets and cash flows in a seasonal company and provide and elementary exercise in the construction of the pro forma financial statements and estimation of fund needs.
Toy World has been facing two basic issues, as follows: - The first one is if it has to change to a level monthly production.
- The second area of concern is the financial arrangement with the bank. …show more content…
The balance sheet under level production shows how the inventory increase, and the loan that is required from the bank. ( Exhibit 3)
2- Financial arrangements with the bank
If level production occurs, Toy World will require a loan from the bank for $ 3.7 million by September which is much more above the bank´s $ 2 million limit.
From June to October, the loan required is above the $ 2 million limit.
The company has to negotiate with the bank, and see if it will be possible to obtain this amount of money, and which interest will be charged, since it has an important impact in the company's profit.
The new increase in operational expenses must be shown here. Under seasonal production the bank requires a minimum of $200,000 to be sitting because the number was linked to the amount of operating expenses. Now that operating expenses have gone up to $210,000 , the bank will raise the minimum of cash needed to $210,000.
Recommendations 1- Should toy world change from seasonal production to level monthly production?
Is recommended to change to level monthly production, because if the company can obtain the loan with a reasonable interest, it is going to make more profit, and it will eliminated the problem that in some months no more than 25% of