Play Time Toy Company

1
Play Time Toy faces a highly seasonal pattern of sales. In the past, Play Time has used a
seasonal production schedule, where the amount produced each month matches the sales
for that month. Under this production plan, inventory is maintained at a constant level.
The production manager, Thomas Lindop, is proposing a switch to a level, or constant,
production schedule. This schedule would result in significant savings in production costs
but would have higher storage and handling costs, fluctuating levels of inventories, and
would also have implications for financing. onathan !ing, president of Play Time Toy,
has been reviewing pro forma income statements, cash budgets, and balance sheets for
the coming year under the two production scenarios. Table 1 shows the pro forma
analysis under seasonal production, and Table " shows the pro forma analysis under level
production.
#reg Cole, chief financial officer of Play Time, prepared the two tables. $e e%plained
that the pro forma analyses in Tables 1 and " ta&e fully into account the 11' interest
payments on the unsecured loan from (ay Trust Company and the )' interest received
from its cash account. *n interest charge of 11'+1" on the balance of the loan at the end
of a month must be paid the ne%t month. ,imilarly, an interest payment of )'+1" on the
cash balance at the end of a month is received in the ne%t month.
The inventory available at the end of -ecember 1../ is 01)/,/// 2measured in terms of
cost to produce3. 4r. Cole assumed that this inventory represents a sales value of
01)/,///+/.511556 7 081),)//.
The inventory and overtime costs in Tables 1 and " are based on the cost information
developed by 4r. Lindop. This information is summari9ed in Table ).
4r. Cole further e%plained how the cost information was used in the pro forma analyses.
:or e%ample, in Table 1, the production in *ugust is 01,;18,///. The overtime cost in
*ugust is therefore calculated to be 051,/// 27/.11 % 21,;18,/// <1,/;.,///33. Play Time
uses LI:= 2last<in, first<out3 accounting, so overtime costs are always charged in the
month that they occur.
"
The annual overtime cost for the seasonal production plan is
0;)1,///. In Table ", under level production, finished goods worth 01,15;,/// are in
inventory at the end of uly. The inventory cost for the month is 0"/,/// 27/./6+1" %
21,15;,/// < 1,55),///33. The annual inventory cost for the level production plan is
01//,///.
1
:rom Practical 4anagement ,cience 2"nd ed., >inston and *lbright, "//1 -u%bury Press, p. ;./<;."?
Case ..13.
"
This assumes that overtime production is used only to satisfy current demand and not to build up
inventory.
4r. Lindop felt that a minimum of 081),)// of inventory 2measured in terms of sales
value, or 01)/,/// measured in terms of cost to produce3 must be &ept on hand at the end
of each month. This inventory level represents a reasonable safety stoc&, re@uired since
orders do not occur uniformly during a month.
4r. !ing was impressed at the possible increase in profit from 0")6,/// under the
seasonal production plan to 0)6),/// under level production. >hile studying the pro
forma proAections, 4r. !ing reali9ed that some combination of the two production plans
might be even better. $e as&ed 4r. Lindop to try to find a production plan with a higher
profit than the seasonal and level plans.
4r. Lindop proceeded to develop a spreadsheet<based linear programming model to
ma%imi9e annual net profit.
Buestions
CoteD 4r. LindopEs model is contained in the file playtime.xls. The spreadsheet is ready
to be optimi9ed, but it has not been optimi9ed yet.
1. Fun the optimi9ation model in the file playtime.xls. >hat is the optimal
production planG >hat is the optimal annual net profitG $ow does this optimal
production plan compare to the seasonal and level production plansG
". ,uppose that Play TimeEs ban&ers will not e%tend any credit over 01.. million
H in other words, the loan balance in any month cannot e%ceed 01.. million.
4odify the spreadsheet model to ta&e into account this restriction. >hat is the
optimal production plan in this caseG >hat is the optimal annual net profitG
). *nnual profit is a measure of reward for Play Time Toy. The ma%imum loan
balance is a measure of ris& for the ban&. Construct a trade<off curve between
optimal annual profit and the ma%imum loan balance.
(5/.")1/ " Prof. uran
Table 1D ,easonal Production 2*nnual net profit 7 ")63
*ctual ProAected for 1..1
-ec 1../ an :eb 4ar *pr 4ay une uly *ug ,ept =ct Cov -ec Total
Production 2sales value3 81/ 1/8 1"5 1;1 1"1 1"1 1"1 1;1 1,;18 1,511 1,."1 ",/16 1,//5 .,///
Inventory 2sales value3 81) 81) 81) 81) 81) 81) 81) 81) 81) 81) 81) 81) 81)
ICC=4I ,T*TI4ICT an :eb 4ar *pr 4ay une uly *ug ,ept =ct Cov -ec Total
Cet sales 1/8 1"5 1;1 1"1 1"1 1"1 1;1 1,;18 1,511 1,."1 ",/16 1,//5 .,///
Cost of goods sold
4aterials J regular wages 6/ 8" .; 81 81 81 .; .1/ 1,/6. 1."1; 1,);/ 515 1,851
=vertime wages / / / / / / / 51 .1 1)1 111 / ;)1
#ross profit )8 ;; 11 ;; ;; ;; 11 ;;6 ;85 1). 151 )1/ ",6//
=perating e%penses 188 188 188 188 188 188 188 188 188 188 188 188 "."15
Inventory cost / / / / / / / / / / / / /
Profit before int J ta%es 211/3 21;;3 21)63 21;;3 21;;3 21;;3 21)63 "1. ".8 )11 )66 15" ;;;
Cet interest payments 1/ " 1 1 " " " ) 6 18 1. 1. 85
Profit before ta%es 215/3 21;53 21)83 21;53 21;53 21;63 21;/3 "15 "./ ))) )1. 1;; )18
Ta%es 2113 21/3 2;63 21/3 21/3 21/3 2;83 86 .. 11) 1"" ;. 1""
Cet profit 21/53 2.63 2.13 2.53 2.63 2.63 2."3 15. 1." ""/ ")6 .1 ")6
*ctual ProAected for 1..1
(*L*CCI ,$IIT -ec 1../ an :eb 4ar *pr 4ay une uly *ug ,ept =ct Cov -ec
Cash 161 68" 1,)51 1,115 .); 8/8 5/; ;1/ 161 161 161 161 161
*ccts receivable ",5"8 .18 "); "61 "6/ "1/ "1/ "6/ 1,5/) ),11) ),18/ ),.8" ),/5)
Inventory 1)/ 1)/ 1)/ 1)/ 1)/ 1)/ 1)/ 1)/ 1)/ 1)/ 1)/ 1)/ 1)/
Cet P+I 1,/6/ 1,/6/ 1,/6/ 1,/6/ 1,/6/ 1,/6/ 1,/6/ 1,/6/ 1,/6/ 1./6/ 1,/6/ 1,/6/ 1,/6/
Total *ssets ;,;/) ),);/ ),1.. ",.86 ",8/; ",518 ",;1; ",)"/ ),)68 ;,888 1,)11 1,616 ;,8)8
*ccts payable "11 )" )8 ;; )8 )8 )8 ;; ;)6 ;.6 168 516 )/"
Cotes payable 58/ / / / / / / / ;/8 1,5// 1,51) 1,515 .55
*ccrued ta%es 8/ "1 2";3 21113 2")"3 2"8"3 2)5)3 2;113 2)";3 2"153 21;)3 2"13 2;3
Long term debt ;1/ ;1/ ;1/ ;1/ ;1/ ;1/ ;"1 ;"1 ;"1 ;"1 ;"1 ;"1 ;//
I@uity ",.)8 ".8)" ",6)5 ",5;; ",1;8 ",;1" ",)11 ","5) ",;)1 ",5") ",8;) ),/8/ ),161
Total liab J e@uity ;,;/) ),);/ ),1.. ",.86 ",8/; ",518 ",;1; ",)"/ ),)68 ;,888 1,)11 1,616 ;,8)8
(5/.")1/ ) Prof. uran
Table "D Level Production 2*nnual net profit 7 )6)3
*ctual ProAected for 1..1
-ec 1../ an :eb 4ar *pr 4ay une uly *ug ,ept =ct Cov -ec Total
Production 2sales value3 81/ 61/ 61/ 61/ 61/ 61/ 61/ 61/ 61/ 61/ 61/ 61/ 61/ .///
Inventory 2sales value3 81) 1,;11 ",/6. ",58; ),)/. ),.); ;,11. 1,15; ;,;15 ),111 ",)65 1,/5. 81)
ICC=4I ,T*TI4ICT an :eb 4ar *pr 4ay une uly *ug ,ept =ct Cov -ec Total
Cet sales 1/8 1"5 1;1 1"1 1"1 1"1 1;1 1,;18 1,511 1,."1 ",/16 1,//5 .,///
Cost of goods sold
4aterials J regular wages 6/ 8" .; 81 81 81 .; .1/ 1,/6. 1,"1; 1,);/ 515 1,851
=vertime wages / / / / / / / / / / / / /
#ross profit )8 ;; 11 ;; ;; ;; 11 1/8 165 561 616 )1/ ),1)1
=perating e%penses 188 188 188 188 188 188 188 188 188 188 188 188 ","15
Inventory cost / " 5 1/ 1) 16 "/ 15 11 ; / / 1//
Profit before int J ta%es 211/1 21;63 21;)3 211;3 21183 21513 21183 )/; )66 ;68 1". 15" 66.
Cet interest payments 1/ ) " 1 1/ 11 "1 "5 )" )6 )1 "" "1;
Profit before ta%es 215/3 21;.3 21;53 211.3 21583 21663 216.3 "66 );5 ;;1 ;.8 1;1 151
Ta%es 2113 2113 21/3 21;3 2163 25/3 2513 .; 118 11/ 15. ;8 1."
Cet profit 21/53 2..3 2.53 21/13 21113 21163 21183 18) ""8 ".1 )". .) )6)
*ctual ProAected for 1..1
(*L*CCI ,$IIT -ec 1../ an :eb 4ar *pr 4ay une uly *ug ,ept =ct Cov -ec
Cash 161 115 6"; 161 161 161 161 161 161 161 161 161 161
*ccts receivable ",5"8 .18 "); "61 "6/ "1/ "1/ "6/ 1,5/) ),11) ),18/ ),.8" )./5)
Inventory 1)/ .;8 1,)11 1,6;. ",116 ",15; ",.61 ),)51 ",./; ".)1; 1,1;. 5.6 1)/
Cet P+I 1,/6/ 1,/6/ 1,/6/ 1,/6/ 1,/6/ 1,/6/ 1,/6/ 1,/6/ 1,/6/ 1,/6/ 1,/6/ 1,/6/ 1,/6/
Total *ssets ;,;/) ),1)) ),)8) ),"51 ),56" ;,/1. ;,;55 ;,88/ 1,61" 5,56" 5,)6; 1,."; ;,8)8
*ccts payable "11 ""1 ""1 ""1 ""1 ""1 ""1 ""1 ""1 ""1 ""1 ""1 ""1
Cotes payable 58/ / / 1/8 6/; 1,"1. 1,.// ",;.) ),/86 ),5.) ",.1) ",//1 8)5
*ccrued ta%es 8/ "1 2"13 21113 2";/3 2".63 2)8.3 2;1/3 2)113 2"5.3 211.3 1/ 55
Long term debt ;1/ ;1/ ;1/ ;1/ ;1/ ;1/ ;"1 ;"1 ;"1 ;"1 ;"1 ;"1 ;//
I@uity ",.)8 ",8)" ",6); ",5)6 ",1)) ",;"" ",)/1 ",186 ",)6/ ",1.. ",8./ ),"18 ),)11
Total liab J e@uity ;,;/) ),1)) ),)8) ),"51 ),56" ;,/1. ;,;55 ;,88/ 1,61" 5,56" 5,)6; 1,."; ;,8)8
(5/.")1/ ; Prof. uran
Play Time Cost Information
Gross margin . The Cost of goods sold 2e%cluding overtime costs3 is 51.1556' of sales
under any production schedule. 4aterials costs are )/' of sales. *ll other non<materials
costs, including regular wages but e%cluding overtime wages, are )1.1556' of sales.
Overtime cost . Funning at capacity but without using any overtime, the plant can
produce 01,/;.,/// of monthly sales. Units produced in e%cess of this capacity in a
month incur an additional overtime cost of 11' of sales. 2The monthly production
capacity of the plant running on full overtime is 0",;//,/// of sales. ,ince Covember has
the ma%imum level of proAected sales at 0"./16.///, the capacity on full overtime should
never pose a problem.3
Inventory cost . The plant has a limited capacity to store finished goods. It can store
01,55),/// worth of sales at the plant. *dditional units must be moved and stored in
rented warehouse space. The cost of storage, handling, and insurance of finished goods
over this capacity is 6' of the sales value of the goods per year, or 6'+1" per month.
(5/.")1/ 1 Prof. uran