Early in January 1994, Jack McClintock, President and part owner of Toy World, Inc., was considering a proposal to adopt level monthly production for the coming year. In the past, the company’s production schedules had always been highly seasonal, reflecting the seasonality of sales. Mr. McClintock was aware that a marked improvement in production efficiency could result from level production, but he was uncertain what the impact on other phases of the business might be.
Toy World, Inc. was a manufacturer of plastic toys for children. Its product groups included toy cars, trucks, construction equipment, rockets, spaceships and satellites, musical instruments, animals, robots, and action figures. In most of these product categories, the company produced a wide range of designs, colors, and sizes. Dol1ar sales of a particular product had sometimes varied by 30-35% from one year to the next. The manufacture of plastic toys was a highly competitive business. The industry was populated by a large number of companies, many of which were short on capital and management talent. Since capital requirements were not large and the technology was relatively simple, it was easy for new competitors to enter the industry. On the other hand, design and price competition was fierce, resulting in short product lives and a relatively high rate of company failures. A company was sometimes able to steal a march on the competition by designing a popular new toy, often of the fad variety. Such items generally commanded very high margins until competitors were able to offer a similar product. For example, Toy World’s introduction of a 1ine of superhero action figures in 1991 had contributed importantly to that year’s profits. In 1992, however, 11 competitors marketed similar products, and the factory price of the Toy World offering plummeted. In recent years competitive pressures on smaller firms had also intensified due to an influx of imported toys produced by foreign toy manufacturers with low labor costs.Company Background
Toy World, Inc. was founded in 1973 by David Dunton after his release from nava l service. Before his military service, he had been employed as production manager by a large manufacturer of plastic toys. Mr. Dunton and his former assistant, Jack McClintock, established Toy World, Inc. with their savings in 1973. Originally a partnership, the firm was incorporated in 1974, with Mr. Dunton taking 75% of the capital stock and Mr. McClintock taking 25%. The latter served as production manager, and Mr. Dunton, as president, was responsible for overall direction of the company’s affairs. After a series of illnesses, Mr. Dunton’s health deteriorated, and he was forced to retire from active participation the business in 1991. Mr. McClintock assumed the presidency at that time. In 1993, Mr. McClintock hired Dan Hoffman, a recent graduate of a prominent eastern technical institute, as production manager. Mr. Hoffman had worked during summers in the plastics plant of a large diversified chemical company and thus had a basic familiarity with plastics production processes.
Toy World, Inc. had experienced relatively rapid growth since its founding and had enjoyed profitable operations each year since 1976. Sa1es had been approximately $8 million in 1993, and on the strength of a number of promising new product sales were projected at $10 million for 1994. Net profits had reached $270,000 in 1993 and were estimated at $351,000 in 1994 under seasonal production. Tables A and B present the latest financial statements for the company. The cost of goods sold had averaged 70% of sales in the past and was expected to maintain roughly that proportion in 1994 under seasonal production. In keeping with the company’s experience, operating expenses were likely to be incurred evenly throughout each month of 1994 under either seasonal o r level production.