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Case Study: Toy World Shunde Tu 000196745

1' +,ert#me 2rem#ums redu$ed 2ro*#ts

' Seasonal e2ans#on and $ontra$t#on o* -or= *or$e resulted #n re$ru#t#n%

d#**#$ult#es and h#%h $osts asso$#ated -#th tra#n#n% and ual#ty $ontrol

3' Ma$h#nery -as sue$ted to hea,y use and *reuent setu2 $han%es dur#n% 2ea= 

 2rodu$t#on t#me'

 & ( $om2ar#son o* t-o methods o* 2rodu$t#on *rom the *#nan$#al 2ers2e$t#,e

I $onstru$ted a $om2rehens#,e model *or the t-o s$enar#os !namely/ seasonal 2rodu$t#on and

le,el 2rodu$t#on& ased on the assum2t#ons %#,en #n the $ase' I atta$h the $om2lete model at

the end o* the $ase study *or your re*eren$e'

#' "rom the net 2ro*#t 2ers2e$t#,e/ assum#n% orro-#n% rate rema#ned the same/ the

 2ro *orma net 2ro*#t *or year 1994 under le,el 2rodu$t#on -as >53/000/ $om2ared

-#th >354/000 under the seasonal 2rodu$t#on/ re2resent#n% a 48 #n$rease??

##' .o-e,er/ *urther analys#s sho-s that/ under le,el 2rodu$t#on/ there -ould e

ser#ous 2rolem -#th $ash 2os#t#on/ as the $om2any a$$umulate hu%e #n,entory #n

the *#rst 7 months that -ere not sold' There*ore/ the $om2any needs to orro-

shortterm loans *rom the an= to *#nan$e #ts o2erat#ons' 3'70 MM' Th#s #s a

ser#ous *la-/ e$ause the an= -as 2roaly only -#ll#n% to etend a $red#t l#ne o* u2 to >'0

MM #n 1994 and any ad,an$er #n e$ess o* >'0 MM -ould e sue$ted to *urther 

ne%ot#at#ons' I* the $om2any -asnt ale to *#nan$e that %a2/ #t -ould not e ale to ado2t

le,el 2rodu$t#on'

###' ets *#rst assume that u2on ne%ot#at#on/ the an= -ould a%ree to #n$rease $red#t

l#m#t ut -ould $har%e the $om2any a h#%her #nterest rate *or the $red#t #n e$ess o* 

>'0MM to $om2ensate *or the r#s=' I $ondu$ted a sens#t#,#ty analys#s to see ho-#n$reased *#nan$#n% $ost -ould #n*luen$e net 2ro*#t' Aesult #s 2resented on net

Key B/S Items - Seasonal Production

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Nov ec !an "e# $ar %&r $ay !un !ul %u' Se& (ct Nov ec

)ime

   %  m  o  u  n   t   *   i  n   +   0   0   0   ,   S      -

.as

Inventory

Notes &aya#le, #an

Key B/S Items - evel Production

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Nov ec !an "e# $ar %&r $ay !un !ul %u' Se& (ct Nov ec

)ime

   %  m  o  u  n   t   *   i  n   +   0   0   0   ,   S      -

.as

Inventory

Notes &aya#le, #an

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Case Study: Toy World Shunde Tu 000196745

 2a%e/ -h#$h sho-s that the 2ro*#t -ould st#ll e relat#,ely h#%h e,en under ,ery

h#%h #nterest $har%es *or add#t#onal $red#t under le,el 2rodu$t#on'

Sensitivity %nalysis - Net Pro2it under level &roduction

300

400

500

00

5 10 15 20 25

Interest ate on Borro6in's in e7cess o 2 $$

   N  e   t   P  r  o   2   i   t   *   i  n   +   0   0   0   ,   S      -

Proit under level&roduction

Proit under seasonal&roduction

#,' Wh#le *#nan$#al analys#s sho-s that le,el 2rodu$t#on out-e#%h seasonal 2rodu$t#on

*rom the net 2ro*#t 2ers2e$t#,e/ -e need to e etremely a-are o* the *a$t that the

model -as ased on the assum2t#on that $om2anys sales -ould eat *ore$ast and

the $om2any -#ll e ale to *#nan$e #ts -or=#n% $a2#tal short*all' I* e#ther o* these

t-o assum2t#ons d#dnt -or= out/ le,el 2rodu$t#on -ould lead to an=ru2t$y'

IB' Solut#ons and Ae$ommendat#ons

a& "#nan$#n%

(s d#s$ussed ao,e/ the $om2any -ould need to *#nan$e as mu$h as >3'7 MM -or=#n%

$a2#tal loans #* #t ado2ted le,el 2rodu$t#on/ -h#le the an= m#%ht only e -#ll#n% to lend>'0MM' )oss#le solut#ons are:

#' Aa#se more eu#ty !$ommon or 2re*erred sto$=s&

##' Issue more onds $on,ert#le onds

###' Aene%ot#ate -#th the an= 

#,' "#nan$e #ts a$$ounts re$e#,ales y %#,#n% u2 a small 2er$enta%e o* them' !Th#s

-#ll only 2art#ally m#t#%ate the 2rolem&

,' )ersuade #ts $ustomers !mostly stores& to 2ur$hase earl#er/ y 2ro,#d#n% some

#n$ent#,es' In th#s -ay/ #n,entory le,el -#ll dro2 and thus redu$#n% *#nan$#n% needs'

 & "ore$ast#n% a#l#ty

(s d#s$ussed ao,e/ le,el 2rodu$t#on -ould reu#re a 2re$#se *ore$ast o* sales *or year 1994'

The $om2any m#%ht $om2are #ts *ore$ast and a$tual sales ,olume throu%h 19911993 to see

-hether the $om2any had %ood *ore$ast a#l#ty' I* the $om2any al-ays m#ssed *ore$ast y a

lar%e numer/ #t must e etremely $aut#ous #n ado2t#n% le,el 2rodu$t#on'

$& ( hyr#d o* seasonal and le,el 2rodu$t#on

There m#%ht e a 2o#nt et-een seasonal and le,el 2rodu$t#on -h#le the $om2any -ould e

ale to alan$e the 2ros and $ons o* oth 2rodu$t#on methods and a$h#e,e a etter return

-#th#n a$$e2tale r#s= le,el' .o-e,er/ *urther $al$ulat#on #s needed'

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