PLAY TIME TOY COMPANY

TSFINMAN
MARCH 10, 2014

Group 1
Atotubo, Jona
Balagot, Brian
Bilat, Lumen
Desucatan, Cris
Ermac, Lynette
Ong, Albert

OBJECTIVE

Show the groups recommendations to PTC re actions to

take

OUTLINE
Background
Issues
Problem
Hypothesis
Decision Variables
Analysis
Conclusion & Recommendations

BACKGROUND
Company is a toy manufacturer
The company is running on seasonal production wherein
peak seasons are from August to December
Machinery are stood idle for seven-and-a-half months
during low season (January to July)
Has a $1.9M Credit line with the bank
Cash should always be 175k as the min operating
requirement
Purchases are 2.7M to 9M

ISSUES

During peak season,

Machinery is subjected to heavy use
Overtime premiums reduced profits
Seasonal expansion and contraction of work force resulted in
recruiting difficulties and high training and quality control costs
Short runs and frequent setup changes caused inefficiencies in
assembly and packaging as workers have difficulty relearning
their operations

With the above issues, the Production Manager is proposing

level monthly production.

PROBLEM

Will level production, in place of seasonal production, be a

better financial decision?

HYPOTHESIS

It is cash-affordable, financially profitable, and financially

beneficial to move to a level production schedule
compared to a seasonal one
Removing overtime through level production can save 200,000 a year
Direct labor savings of 235,000 can result from orderly production under
level production
Higher handling costs estimated at 100,000 annually
Interest expense is affordable through the use of the credit line
Cost of goods sold will be lowered to 65.16% under level production
versus 70% under seasonal production

DECISION VARIABLES

Net income under level production must be higher than

seasonal production due to savings

Maximum notes payable should be within the 1.9M

range so that further negotiations are not necessary

ANALYSIS
Step 1: Project Income statements (no interest Expense
yet)
Step 2: Compute balance sheets (without notes payable
plugged in)
Step 3: plug in notes payable
Step 4: Compute Cash Flow Statements
Step 5: Recompute Income Statement to include Interest
Expense

ANALYSIS
STEP 1: PROJECT INCOME STATEMENTS (NO INTEREST EXPENSE YET)

Net Sales

Cost of
Goods Sold

Jan
108

Feb
126

Mar
145

Apr
125

May
125

Jun

Jul
125

145

Aug
1458

Sep
1655

70.37

82.10

94.48

81.45

81.45

81.45

94.48 950.03

1,078.40

Gross Profit
37.63
Operating
expenses
196.33
Interest
Profit (loss)
before taxes (158.71)
Income
taxes
(53.96)

43.90

50.52

43.55

43.55

43.55

50.52 507.97

196.33

196.33

196.33

196.33

196.33

(159.21)

(164.22)

(169.97)

Net Profit

(104.75)

(152.43) (146.80)
(51.83)

(49.91)

(54.13)

(55.83)

(57.79)

(100.61)

(96.89)

(105.08)

(108.38)

(112.18)

Oct
1925

Nov
2057

Dec
Total
1006
9000

100.00%

1,254.33

1,340.34

655.51 5864.4

65.16%

576.60

670.67

716.66

350.49 3135.6

34.84%

196.33

196.33

196.33

196.33

196.33

26.18%

(168.27) 283.68

346.65

447.38

501.86

146.37 606.33

6.74%

96.45

117.86

152.11

170.63

49.76 206.15

2.29%

(111.06) 187.23

228.79

295.27

331.23

96.60 400.18

4.45%

196.33

(57.21)

2356

ANALYSIS
STEP 2: COMPUTE BALANCE SHEETS (WITHOUT NOTES PAYABLE PLUGGED IN)
Cash - a

1990 Jan
Feb
175.00
558.93
724.72

Mar
175.00

Apr
175.00

May
175.00

Jun
175.00

Jul
175.00

Aug
175.00

Sep
175.00

Oct
175.00

Nov
175.00

Dec
175.00

Accounts
Receivable - b

2,628.00

958.00

234.00

271.00

270.00

250.00

250.00

270.00

1,603.00

3,113.00

3,580.00

3,982.00

3,063.00

Inventory - c

530.00

948.33

1,354.93

1,749.14

2,156.39

2,563.64

2,970.89

3,365.11

2,903.78

2,314.08

1,548.45

696.81

530.00

Current Assets

3,333.00

2,465.25

2,313.65

2,195.14

2,601.39

2,988.64

3,395.89

3,810.11

4,681.78

5,602.08

5,303.45

4,853.81

3,768.00

Net plant and

equipment - d

1,070.00

1,070.00

1,070.00

1,070.00

1,070.00

1,070.00

1,070.00

1,070.00

1,070.00

1,070.00

1,070.00

1,070.00

1,070.00

Total assets

4,403.00

3,535.25

3,383.65

3,265.14

3,671.39

4,058.64

4,465.89

4,880.11

5,751.78

6,672.08

6,373.45

5,923.81

4,838.00

225.00

225.00

225.00

225.00

225.00

225.00

225.00

225.00

225.00

225.00

225.00

Accounts payable
-e

255.00

Notes payable,
bank - f

680.00

225.00

Accrued taxes - g

80.00

27.00

(24.00)

(153.00)

(235.00)

(286.00)

(369.00)

(419.00)

(334.00)

(260.00)

(128.00)

18.00

25.00

Long-term debt,
current portion

50.00

50.00

50.00

50.00

50.00

50.00

50.00

50.00

50.00

50.00

50.00

50.00

50.00

Current liabilities
Long-term debt h
Shareholder's
equity
Total Liabilities
and stockholder's
equity

1,065.00

302.00

251.00

122.00

40.00

(11.00)

(94.00)

(144.00)

(59.00)

15.00

147.00

293.00

300.00

400.00

400.00

400.00

400.00

400.00

400.00

375.00

375.00

375.00

375.00

375.00

375.00

350.00

2,938.00

2,833.25

2,732.65

2,635.76

2,530.68

2,422.30

2,310.12

2,199.06

2,386.29

2,615.08

2,910.35

3,241.58

3,338.18

4,403.00

3,535.25

3,383.65

3,157.76

2,970.68

2,811.30

2,591.12

2,430.06

2,702.29

3,005.08

3,432.35

3,909.58

3,988.18

ANALYSIS
STEP 3: PLUG IN NOTES PAYABLE
Cash - a
Accounts
Receivable
-b
Inventory c
Current
Assets
Net plant
and
equipment
-d
Total assets
Accounts
payable - e
Notes
payable,
bank - f
Accrued
taxes - g
Long-term
debt,
current
portion
Current
liabilities
Long-term
debt - h
Shareholde
r's equity
Total
Liabilities
and
stockholder
's equity

1990 Jan
175.00
558.93

Feb
724.72

Mar
175.00

Apr
175.00

May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
175.00
175.00
175.00
175.00
175.00
175.00
175.00
175.00

2,628.00

958.00

234.00

271.00

270.00

250.00

250.00

270.00

1,603.00

3,113.00

3,580.00

3,982.00

3,063.00

530.00

948.33

1,354.93

1,749.14

2,156.39

2,563.64

2,970.89

3,365.11

2,903.78

2,314.08

1,548.45

696.81

530.00

3,333.00

2,465.25

2,313.65

2,195.14

2,601.39

2,988.64

3,395.89

3,810.11

4,681.78

5,602.08

5,303.45

4,853.81

3,768.00

1,070.00

1,070.00

1,070.00

1,070.00

1,070.00

1,070.00

1,070.00

1,070.00

1,070.00

1,070.00

1,070.00

1,070.00

1,070.00

4,403.00

3,535.25

3,383.65

3,265.14

3,671.39

4,058.64

4,465.89

4,880.11

5,751.78

6,672.08

6,373.45

5,923.81

4,838.00

255.00

225.00

225.00

225.00

225.00

225.00

225.00

225.00

225.00

225.00

225.00

225.00

225.00

680.00

107.38

700.71

1,247.34

1,874.77

2,450.05

3,049.49

3,667.00

2,941.10

2,014.23

849.82

80.00

27.00

(24.00)

(153.00)

(235.00)

(286.00)

(369.00)

(419.00)

(334.00)

(260.00)

(128.00)

18.00

25.00

50.00

50.00

50.00

50.00

50.00

50.00

50.00

50.00

50.00

50.00

50.00

50.00

50.00

1,065.00

302.00

251.00

229.38

740.71

1,236.34

1,780.77

2,306.05

2,990.49

3,682.00

3,088.10

2,307.23

1,149.82

400.00

400.00

400.00

400.00

400.00

400.00

375.00

375.00

375.00

375.00

375.00

375.00

350.00

2,938.00

2,833.25

2,732.65

2,635.76

2,530.68

2,422.30

2,310.12

2,199.06

2,386.29

2,615.08

2,910.35

3,241.58

3,338.18

4,403.00

3,535.25

3,383.65

3,265.14

3,671.39

4,058.64

4,465.89

4,880.11

5,751.78

6,672.08

6,373.45

5,923.81

4,838.00

ANALYSIS
STEP 4: COMPUTE CASH FLOW STATEMENTS
Jan

Feb

Mar

Apr

May

Jun

Net Income

(104.75)

(100.61)

(96.89)

(105.08)

(108.38)

Add'l AR

1,670.00

724.00

(37.00)

1.00

20.00

Add'l INV
Add'l
Payable
Add'l Notes
Payable
Add'l
Accrued
Taxes

(418.33)

(406.60)

(394.22)

(407.25)

(407.25)

Jul

(112.18)

(407.25)

Aug

Sep

Oct

Nov

Dec

(111.06)

187.23

228.79

295.27

331.23

96.60

(20.00)

(1,333.00)

(1,510.00)

(467.00)

(402.00)

919.00

(394.22)

461.33

589.70

765.63

851.64

166.81

(30.00)

(680.00)

107.38

593.33

546.63

627.43

575.28

599.44

617.51

(725.90)

(926.87)

(1,164.41)

(53.00)

(51.00)

(129.00)

(82.00)

(51.00)

(83.00)

(50.00)

85.00

74.00

132.00

146.00

7.00

383.93

165.79

(549.73)

0.00

(0.00)

25.00

0.00

0.00

(0.00)

(0.00)

(0.00)

25.00

Net CF

383.93

165.79

(549.73)

0.00

(0.00)

0.00

0.00

0.00

(0.00)

(0.00)

(0.00)

0.00

Cash Beg

175.00

558.93

724.72

175.00

175.00

175.00

175.00

175.00

175.00

175.00

175.00

175.00

Add'l Cash

383.93

165.79

(549.73)

0.00

(0.00)

0.00

0.00

0.00

(0.00)

(0.00)

(0.00)

0.00

End Cash

558.93

724.72

175.00

175.00

175.00

175.00

175.00

175.00

175.00

175.00

175.00

175.00

CF from
Operations
Add'l Loan CP
Add'l LT
Debt
CF from
Financing

(25.00)

(25.00)

(25.00)

(25.00)

ANALYSIS
STEP 5: RECOMPUTE INCOME STATEMENT TO INCLUDE INTEREST EXPENSE

Jan
Net
Sales
Cost of
Goods
Sold
Gross
Profit
Operati
ng
expense
s
Interest
Profit
(loss)
before
taxes
Income
taxes
Net
Profit

Feb
108

Mar
126

Apr
145

May
125

Jun
125

Jul
125

Aug
145

1458

Sep

Oct

Nov

Dec

Total

1655

1925

2057

1006

9000

100.00%

70.37

82.10

94.48

81.45

81.45

81.45

94.48

950.03

1,078.40

1,254.33

1,340.34

655.51

5864.4

65.16%

37.63

43.90

50.52

43.55

43.55

43.55

50.52

507.97

576.60

670.67

716.66

350.49

3135.6

34.84%

196.33

196.33

196.33

196.33

196.33

196.33

196.33

196.33

196.33

196.33

196.33

196.33

2356

26.18%

0.98

6.42

11.43

17.19

22.46

27.95

33.61

26.96

18.46

7.79

173.27

(158.71)

(152.43)

(146.80)

(159.21)

(164.22)

(169.97)

(168.27)

283.68

346.65

447.38

501.86

146.37

606.33

6.74%

(53.96)

(51.83)

(49.91)

(54.13)

(55.83)

(57.79)

(57.21)

96.45

117.86

152.11

170.63

49.76

206.15

2.29%

(104.75)

(100.61)

(96.89)

(105.08)

(108.38)

(112.18)

(111.06)

187.23

228.79

295.27

331.23

96.60

400.18

4.45%

ANALYSIS
STEP 6: COMPARE RELEVANT FINANCIAL RATIOS

Seasonal

ROI
Net
Margin
ATO
ROCurrent
Assets

6.06%
3.26%
1.86

2.39

Level
Income/
Total
8.27% Assets
Income/
4.45% Sales
Sales/Tot
1.86 al Assets

2.39

DuPPont Analysis
Seasonal
Profit Margin

Level

3.26%

5.71%

Turnover

1.86

1.86

Leverage

1.5

1.4

ROA

6.06%

10.62%

ROE

9.07%

14.89%

CONCLUSION / RECOMMENDATION

Level production is going to be more profitable driven by the savings in

gross margin of almost 5% of sales which is the largest difference between
the old and new income statement. Thus the company should go for level
production, but make sure that its credit line is fixed and ready and the
interest expense is going to be affordable so that the company can still
stand to gain close to the 160k projected additional income due to this
GM Savings
Plus Handling
Plus Interest
Diff OPEX
Net Savings

435.60
(100.00)
(173.27)
(273.27)
162.33

The company should also find a way to make level production feasible
given that most of their customers are make to order. If they have items
that are regularly ordered from them, maybe these items can have regular
stock but they are going to encounter a new risk which is inventory risk.