47964523 Toy World Inc Case Solution

Table A

Table A: Condensed Income Statements, 1991-1993 (thousands of dollars)

1991

1992

1993

Net sales Cost of goods sold Gross profit Operating expenses Interest expense Interest income Profit before taxes Federal income taxes Net profit

$5,213 3,597 $1,616 1,199 68 20 $369 125 $244

$6,167 4,440 $1,727 1,542 75 15 $125 43 $82

$7,967 5,577 $2,390 1,912 85 16 $409 139 $270

Page 1

Table B

Table B: Balance Sheet at December 31, 1993 (thousands of dollars)

Cash Accounts receivable Inventory Current assets Plant and equipment, net Total assets Accounts payable Notes payable, bank Accrued taxes(a) Long-term debt, current portion Current liabilities Long-term debt Shareholders' equity Total liabilities and shareholders' equity

$200 2,905 586 $3,691 1,176 $4,867 $282 752 88 50 $1,172 400 3,295 $4,867

(a)The company was required to make estimated tax payments on the 15th of April, June, September, and December. In 1993 it elected to base its estimated tax payments on the previous year's tax. The balance of $88,000 was due on March 15, 1994.

Page 1

Table C

Table C: Monthly Sales Data (thousands of dollars)

Sales 1993 Actual 1994 Projected

Total $7,967 $10,000

Jan $64 $120

Feb 88 140

Mar 96 160

Apr 88 140

May 87 140

Jun 95 140

Jul 96 160

Aug 1,251 1,620

Sep 1,474 1,840

Page 1

Table C

Oct 1,723 2,140

Nov 1,965 2,285

Dec 940 1,115

Page 2

Exhibit 1

Exhibit 1

Pro Forma Balance Sheets Under Seasonal Production, 1994 (thousands of dollars)

Note

Actual Dec. 31, 1993

Jan.

Feb.

Mar.

Apr.

May

June

July

Aug.

Cash Accounts receivable Inventory Current assets Net plant and equipment Total assets

(a) (b) (c)

$200 2,905 586 $3,691

$878 1,060 586 $2,524 1,176 $3,700 $36 0 31 50 $117 400 3,183

$1,526 260 586 $2,372 1,176 $3,548 $42 0 (23) 50 $69 400 3,079

$1,253 300 586 $2,139 1,176 $3,315 $48 0 (162) 50 ($64) 400 2,979

$1,054 300 586 $1,940 1,176 $3,116 $42 0 (251) 50 ($159) 400 2,875

$915 280 586 $1,781 1,176 $2,957 $42 0 (305) 50 ($213) 400 2,770

$696 280 586 $1,562 1,176 $2,738 $42 0 (394) 50 ($302) 375 2,665

$527 300 586 $1,413 1,176 $2,589 $48 0 (448) 50 ($350) 375 2,564

$200 1,780 586 $2,566 1,176 $3,742 $486 433 (352) 50 $617 375 2,750

(d)

1,176 $4,867 $282 752 88 50 $1,172 400 3,295

Accounts payable (e) Notes payable, bank (f) Accrued taxes (g) Long-term debt, current portion Current liabilities Long-term debt Shareholders' equity Total liabilities and equity

(h)

$4,867

$3,700

$3,548

$3,315

$3,116

$2,957

$2,738

$2,589

$3,742

Notes: (a)Assumed maintenance of minimum $200,000 balance; includes excess cash in months when company is out of debt. (b)Assumed 60-day collection period. (c)Assumed inventories maintained at December 31, 1993 level for all of 1994. (d)Assumed equipment purchases equal to depreciation expense. (e)Assumed equal to 30% of the current month's sales and related to material purchases of $3,000,000 for 1994 as against sales of $10 million. This represents a 30-day payment period. Since inventories are level, purchases will follow seasonal production (f)Plug figure. (g)Taxes payable on 1993 income are due on March 15, 1994. On April 15, June 15, September 15, and December 15, 1994, payments of 25% each of the estimated tax for 1994 are due. In estimating its tax liability for 1994, the company has the option of using the prior year's tax liability ($139,000) for its estimate and making any adjusting tax payments in 1995. Alternatively, the company could estimate its 1994 tax liability directly. Toy World planned to use its prior year's tax liability as its estimate and to pay $35,000 in April, June, September, and December. (h)To be repaid at the rate of $25,000 each June and December.

Page 1

Exhibit 1

Sept.

Oct.

Nov.

Dec.

$200 3,460 586 $4,246 1,176 $5,422 $552 1,741 (271) 50 $2,072 375 2,975

$200 3,980 586 $4,766 1,176 $5,942 $642 1,745 (126) 50 $2,311 375 3,256

$200 4,425 586 $5,211 1,176 $6,387 $686 1,677 33 50 $2,446 375 3,566

$200 3,400 586 $4,186 1,176 $5,362 $334 942 40 50 $1,366 350 3,646

$5,422

$5,942

$6,387

$5,362

Page 2

Exhibit 2

Exhibit 2

Pro Forma Income Statement Under Seasonal Production, 1994 (thousands of dollars)

Jan.

Feb.

Mar.

Apr.

May

June

July

Aug.

Sept.

Net sales Cost of goods sold(a) Gross profit Operating expenses(b) Interest expense Interest income(c) Profit (loss) before taxes Income taxes(d) Net Profit

$120 84 $36 200 7 2 ($169) (57) ($112)

$140 98 $42 200 4 4 ($158) (54) ($104)

$160 112 $48 200 4 5 ($151) (51) ($100)

$140 98 $42 200 4 4 ($158) (54) ($104)

$140 98 $42 200 4 3 ($159) (54) ($105)

$140 98 $42 200 4 3 ($159) (54) ($105)

$160 112 $48 200 3 2 ($153) (52) ($101)

$1,620 1,134 $486 200 5 1 $282 96 $186

$1,840 1,288 $552 200 12 1 $341 116 $225

(a)Assumed cost of goods sold equal to 70% sales. (b)Assumed to be same for each month throughout the year. (c)Toy World expected to earn a 4% annualized rate of return on average monthly cash balances.

(d)Negative figures are tax credits from operating losses, and reduced accrued taxes shown on balance sheet. The federal tax rate on all earnings was 34%

Page 1

Exhibit 2

Oct.

Nov.

Dec.

Total

$2,140 1,498 $642 200 17 1 $426 145 $281

$2,285 1,600 $685 200 17 1 $469 159 $310

$1,115 780 $335 200 14 1 $122 42 $80

$10,000 7,000 $3,000 2,400 95 28 $533 182 $351

Page 2

Toy World, Inc. Net Savings from Level Production

Net Profit (level production) Net Profit (seasonal production) Net savings from shift to level production

Jan. -$116.50 -112 -$4.50

Feb. -$107.56 -$104.00 -$3.56

Mar. -$102.68 -$100.00 -$2.68

Apr. -$108.74 -$104.00 -$4.74

May -$111.97 -$105.00 -$6.97

June -$114.94 -$105.00 -$9.94

July -$113.49 -$101.00 -$12.49

Aug. $219.69 $186.00 $33.69

Sept. $267.22 $225.00 $42.22

Oct. $333.08 $281.00 $52.08

Nov. $370.61 $310.00 $60.61

Dec. Total $106.37 521.0873 $80.00 $351.00 $26.37 $170.09

Toy World, Inc. Pro Forma Balance Sheets Under Level Production, 1994 (thousand of dollars)

Jan.

Feb.

Mar.

Apr.

May

June

July

Aug.

Cash Accounts receivable Inventory Current assets Net plant and equipment Total assets Accounts payable Notes payable, bank Accrued taxes Long-term debt, current portion Current liabilities Long-term debt Shareholders' equity Total liabilities and equity check

$620.11 $1,060.00 $1,050.38 $2,730.49 $1,176.00 $3,906.49 $250.00 $0.00 $27.99 $50.00 $327.99 $400.00 $3,178.50 $3,906.49 $0.00

$805.78 $260.00 $1,501.74 $2,567.52 $1,176.00 $3,743.52 $250.00 $0.00 -$27.42 $50.00 $272.58 $400.00 $3,070.94 $3,743.52 $0.00

$200.00 $300.00 $1,940.08 $2,440.08 $1,176.00 $3,616.08 $250.00 $116.14 -$168.32 $50.00 $247.82 $400.00 $2,968.26 $3,616.08 $0.00

$200.00 $300.00 $2,391.44 $2,891.44 $1,176.00 $4,067.44 $250.00 $767.26 -$259.34 $50.00 $807.92 $400.00 $2,859.52 $4,067.44 $0.00

$200.00 $280.00 $2,842.80 $3,322.80 $1,176.00 $4,498.80 $250.00 $1,368.27 -$317.02 $50.00 $1,351.25 $400.00 $2,747.55 $4,498.80 $0.00

$200.00 $280.00 $3,294.16 $3,774.16 $1,176.00 $4,950.16 $250.00 $2,053.79 -$411.23 $50.00 $1,942.56 $375.00 $2,632.61 $4,950.16 $0.00

$200.00 $300.00 $3,732.50 $4,232.50 $1,176.00 $5,408.50 $250.00 $2,684.08 -$469.70 $50.00 $2,514.38 $375.00 $2,519.12 $5,408.50 $0.00

$200.00 $1,780.00 $3,220.38 $5,200.38 $1,176.00 $6,376.38 $250.00 $3,319.10 -$356.52 $50.00 $3,262.58 $375.00 $2,738.80 $6,376.38 $0.00

Notes: Accounts receivable - Sales of the last two months Net plant and equipment - Equal to depreciation expense Accounts payable - 30% of sales ($3,000,000/12) = $250,000 per month Notes payable - Balancing figure Long-term debt (current portion) - $50 Long-term debt - $400 as of December 1993, with $25 being paid off every June and December Shareholders' equity - Beginning equity + net income (loss) per month

Sept.

Oct.

Nov.

Dec.

$200.00 $3,460.00 $2,565.04 $6,225.04 $1,176.00 $7,401.04 $250.00 $3,973.88 -$253.87 $50.00 $4,020.01 $375.00 $3,006.02 $7,401.04 $0.00

$200.00 $3,980.00 $1,714.40 $5,894.40 $1,176.00 $7,070.40 $250.00 $3,138.58 -$82.28 $50.00 $3,356.30 $375.00 $3,339.10 $7,070.40 $0.00

$200.00 $4,425.00 $769.37 $5,394.37 $1,176.00 $6,570.37 $250.00 $2,077.01 $108.64 $50.00 $2,485.65 $375.00 $3,709.72 $6,570.37 $0.00

$200.00 $3,400.00 $586.00 $4,186.00 $1,176.00 $5,362.00 $250.00 $767.47 $128.44 $50.00 $1,195.91 $350.00 $3,816.09 $5,362.00 $0.00

Toy World, Inc. Pro Forma Income Statement Under Level Production, 1994 (thousands of dollars) Jan. Feb. Mar. Apr. May June July Aug. Sept.

Net sales Cost of goods sold Gross profit Operating expenses Interest expense Interest income Profit (loss) before taxes Income taxes Net Profit

$120.00 $78.12 $41.88 $209.58 $9.25 $0.44 -$176.51 -$60.01 -$116.50

$140.00 $91.14 $48.86 $209.58 $3.61 $1.36 -$162.97 -$55.41 -$107.56

$160.00 $104.16 $55.84 $209.58 $3.61 $1.77 -$155.58 -$52.90 -$102.68

$140.00 $91.14 $48.86 $209.58 $4.48 $0.44 -$164.76 -$56.02 -$108.74

$140.00 $91.14 $48.86 $209.58 $9.36 $0.44 -$169.65 -$57.68 -$111.97

$140.00 $91.14 $48.86 $209.58 $13.87 $0.44 -$174.15 -$59.21 -$114.94

$160.00 $104.16 $55.84 $209.58 $18.65 $0.44 -$171.95 -$58.46 -$113.49

$1,620.00 $1,054.62 $565.38 $209.58 $23.38 $0.44 $332.86 $113.17 $219.69

$1,840.00 $1,197.84 $642.16 $209.58 $28.14 $0.44 $404.88 $137.66 $267.22

Notes: Net sales - Estimated 1994 net sales per month COGS - 65.1% of net sales per month Operating expenses - $200*12 = $2,400 annually under seasonal production+ $ 115 additional storage/handling costs = $2,515 Interest expense Interest income Income taxes - 34% of profit (loss) before taxes

Oct.

Nov.

Dec.

Total

$2,140.00 $1,393.14 $746.86 $209.58 $33.05 $0.44 $504.67 $171.59 $333.08

$2,285.00 $1,487.54 $797.47 $209.58 $26.79 $0.44 $561.54 $190.92 $370.61

$1,115.00 $725.87 $389.14 $209.58 $18.82 $0.44 $161.17 $54.80 $106.37

$10,000.00 $6,510.00 $3,490.00 $2,515.00 $193.01 $7.54 $789.53 $268.44 $521.09

Toy World, Inc. Cash Budget Under Level Productions, 1994 (thousands of dollars)

Jan. Inflows Collections After-tax interest income Total Outflows Payments of accounts payable Tax payments Repayment of long-term debt Operating expenses Interest expense Wages Total Net inflow (outflow) Beginning cash Ending cash before any loan increase or repayment Loan availment Loan repayment End-of-month cash balance Min cash balance Loan balance, beg. Availment (Repayment) Loan balance, end Long-term debt Balance, beg. Repayment Balance, end Interest Expense on long-term debt on notes payable

Feb.

Mar.

Apr.

May

June

$1,965.00 $0.44 $1,965.44

$940.00 $1.36 $941.36

$120.00 $1.77 $121.77

$140.00 $0.44 $140.44

$160.00 $0.44 $160.44

$140.00 $0.44 $140.44

$282.00 $0.00 $0.00 $209.58 $9.25 $292.50 $793.33 $1,172.11 $200.00 $1,372.11 $0.00 $752.00 $620.11 $200.00 $752.00 $752.00 $0.00

$250.00 $0.00 $0.00 $209.58 $3.61 $292.50 $755.69 $185.67 $620.11 $805.78 $0.00 $0.00 $805.78

$250.00 $88.00 $0.00 $209.58 $3.61 $292.50 $843.69 -$721.92 $805.78 $83.86 $116.14 $0.00 $200.00

$250.00 $35.00 $0.00 $209.58 $4.48 $292.50 $791.56 -$651.12 $200.00 -$451.12 $651.12 $0.00 $200.00

$250.00 $0.00 $0.00 $209.58 $9.36 $292.50 $761.45 -$601.01 $200.00 -$401.01 $601.01 $0.00 $200.00

$250.00 $35.00 $3.34 $209.58 $13.87 $292.50 $804.30 -$663.86 $200.00 -$463.86 $663.86 $0.00 $200.00

$0.00 $0.00 $0.00

$0.00 -$116.14 $116.14

$116.14 -$651.12 $767.26

$767.26 -$601.01 $1,368.27

$1,368.27 -$663.86 $2,032.13

$450.00 $0.00 $450.00

$450.00 $0.00 $450.00

$450.00 $0.00 $450.00

$450.00 $0.00 $450.00

$450.00 $0.00 $450.00

$450.00 $25.00 $425.00

9.625% 9.000%

$3.61 $5.64 $9.25

$3.61 $0.00 $3.61

$3.61 $0.00 $3.61

$3.61 $0.87 $4.48

$3.61 $5.75 $9.36

$3.61 $10.26 $13.87

Interest income

4.00%

July

Aug.

Sept.

Oct.

Nov.

Dec.

Total

$140.00 $0.44 $140.44

$140.00 $0.44 $140.44

$160.00 $0.44 $160.44

$1,620.00 $0.44 $1,620.44

$1,840.00 $0.44 $1,840.44

$2,140.00 $ $0.44 $ $2,140.44 $

9,505 8 9,513

$250.00 $0.00 $0.00 $209.58 $18.65 $292.50 $770.73 -$630.29 $200.00 -$430.29 $630.29 $0.00 $200.00

$250.00 $0.00 $0.00 $209.58 $23.38 $292.50 $775.46 -$635.02 $200.00 -$435.02 $635.02 $0.00 $200.00

$250.00 $35.00 $0.00 $209.58 $28.14 $292.50 $815.22 -$654.78 $200.00 -$454.78 $654.78 $0.00 $200.00

$250.00 $0.00 $0.00 $209.58 $33.05 $292.50 $785.13 $835.31 $200.00 $1,035.31 $0.00 $835.31 $200.00

$250.00 $0.00 $0.00 $209.58 $26.79 $292.50 $778.87 $1,061.57 $200.00 $1,261.57 $0.00 $1,061.57 $200.00

$250.00 $35.00 $4.55 $209.58 $18.82 $292.50 $810.45 $1,329.99 $200.00 $1,529.99 $0.00 $1,329.99 $200.00 200

$2,032.13 -$630.29 $2,662.42

$2,662.42 -$635.02 $3,297.44

$3,297.44 -$654.78 $3,952.23

$3,952.23 $835.31 $3,116.92

$3,116.92 $1,061.57 $2,055.35

$2,055.35 $1,329.99 $725.36

$425.00 $0.00 $425.00

$425.00 $0.00 $425.00

$425.00 $0.00 $425.00

$425.00 $0.00 $425.00

$425.00 $0.00 $425.00

$425.00 $25.00 $400.00

$3.41 $15.24 $18.65

$3.41 $19.97 $23.38

$3.41 $24.73 $28.14

$3.41 $29.64 $33.05

$3.41 $23.38 $26.79

$3.41 $15.42 $18.82

Toy World, Inc. Schedule of Changes Affecting Inventory, 1994 (thousands of dollars) Jan. Finished Goods, Beg. Finished Goods Completed Finished Goods Available for Sale Cost of Goods Sold Finished Goods, End. $586.00 $542.50 $1,128.50 $78.12 $1,050.38 Feb. $1,050.38 $542.50 $1,592.88 $91.14 $1,501.74 Mar. $1,501.74 $542.50 $2,044.24 $104.16 $1,940.08 Apr. $1,940.08 $542.50 $2,482.58 $91.14 $2,391.44 May $2,391.44 $542.50 $2,933.94 $91.14 $2,842.80 June $2,842.80 $542.50 $3,385.30 $91.14 $3,294.16 July $3,294.16 $542.50 $3,836.66 $104.16 $3,732.50 Aug. $3,732.50 $542.50 $4,275.00 $1,054.62 $3,220.38

Toy World, Inc. Calculation of Accrued Taxes for 1994 (thousands of dollars) Jan. Accrued Taxes, beg. Taxes Payable on Profits in Month Taxes Paid Accrued Taxes, end $88.00 -$60.01 $0.00 $27.99 Feb. $27.99 -$55.41 $0.00 -$27.42 Mar. -$27.42 -$52.90 $88.00 -$168.32 Apr. -$168.32 -$56.02 $35.00 -$259.34 May -$259.34 -$57.68 $0.00 -$317.02 June -$317.02 -$59.21 $35.00 -$411.23 July -$411.23 -$58.46 $0.00 -$469.70 Aug. -$469.70 $113.17 $0.00 -$356.52

Notes: Finished goods (completed) - COGS/12 Taxes paid - $88 (previous year's balance) on March, $35 on April, June, September, and December

Sept. $3,220.38 $542.50 $3,762.88 $1,197.84 $2,565.04

Oct. $2,565.04 $542.50 $3,107.54 $1,393.14 $1,714.40

Nov. $1,714.40 $542.50 $2,256.90 $1,487.54 $769.37

Dec. $769.37 $542.50 $1,311.87 $725.87 $586.00

Total $25,608.29 $6,510.00 $32,118.29 $6,510.00 $25,608.29

Sept. -$356.52 $137.66 $35.00 -$253.87

Oct. -$253.87 $171.59 $0.00 -$82.28

Nov. -$82.28 $190.92 $0.00 $108.64

Dec. $108.64 $54.80 $35.00 $128.44

Total -$2,121.08 $268.44 $228.00 -$2,080.64