Essay on Play Time Toy Co

1399 Words Sep 13th, 2005 6 Pages
Play Time Toy Company

I. Introduction

Background

Play Time Toy Company is a plastic toy manufacturer. It has experienced rapid growth since founding, recently expanding its operations to allow further growth. From 1973 until the early 1990's, the company specialized in seasonal manufacturing, producing in direct response to customer orders. However, in early 1991, the president of Play Time Toy Company, Jonathon King, was considering a change from seasonal to level production in the upcoming year.

Regardless of which method is used, the company's sales are seasonal with 80% of dollar volume sold between August and November. Under seasonal production, the cost of goods sold is 70% of sales. However, under level
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To make this decision, a proforma balance sheet and income statement must be constructed. We will examine whether level production is feasible given the company's presently strained working capital position. In doing so, we will determine the company's necessary line of credit under level production, compared with the credit line associated with seasonal production. By examining proforma financial statements before and after level production and comparing both lines of credit, we will recommend the more favorable production decision.

II. Solution

To determine whether level production would be more profitable than seasonal production, we constructed a cash budget, proforma balance sheet, and income statement. To construct the cash budget, we subtracted our cash outflows, current accounts payable, cost of goods sold, operating expenses, notes payable, current L-T debt, tax payment, and prior accounts payable from our cash inflows. Our cash inflows consist of accounts receivable from sales 60 days prior and the beginning cash balance. We used the ending cash amount on the cash budget for the beginning cash account on the balance sheet.

We constructed the balance sheet by taking the cash amount determined by the cash budget and adding accounts receivables from the previous

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