Turn-in Assignment: Toyworld
Submit an excel file with your completed pro-forma in the Analysis tab, and the answers to questions 3 and 4 (you will see space for these answers at the bottom of the Analysis worksheet).
In this case you will be comparing the costs of production under a seasonal production plan (in which Toyworld produces toys to order) with the costs of a level production plan (in which Toyworld produces toys at a steady rate throughout the year). Level production lowers overtime and production costs but increases inventory, storage, handling, and obsolescence costs. There may be other costs and benefits of level vs. seasonal production that will be revealed in your pro forma forecast.
Below are some hints to guide you along the way:
Helpful Hints: Income Statement
First, you will prepare the pro forma income statement under level production.
Helpful Hints, Balance Sheet:
The following identity will be helpful to calculate inventory from month to month:
= Inventory Available
- Cost of Goods Sold
= Ending Inventory
This table is also in your spreadsheet in rows 46-51.
Assuming that inventory levels are the same in Dec 1993 and Dec 1994 means, in turn, that the total cost of the goods sold by Toyworld during 1994 is equal to the total cost of the goods it produces during 1994. If you have calculated the COGS for each month above, then the total COGS for the year will be filled in for you, in cell O8. Take this figure, divide by 12, and use this as your monthly production for all 12 months to fill in the cells in row 48.
= AP Avail
- Payments to Suppliers
= Ending AP
The switch to level production will also affect this item, since Toyworld’s production schedule will change. Footnote (e) from Exhibit 1 tells us that Toyworld will purchase $3M in materials in 1994. Since production is level, divide this by 12 to get your purchases for each month. The payments to suppliers during a month will be simply the beginning AP for that month, since Toyworld pays in 30 days.
Beginning Accrued Taxes
+ Current Taxes
= Accrued Taxes Avail
- Payments to Gov’t
= Ending Accrued Taxes
The Current Taxes figure is just the tax line from the income statement (row 16). Use footnote (g) in Exhibit 1 for help with the amounts and timing of payments to the government. Note that Toyworld makes a payment in March for its taxes due at the end of 1993, and it also makes payments in April, June, Sept. and Dec. based on its estimated taxable income for 1994.
Now, return back to the income statement.
Incorporate interest income and expense back into your pro forma income statement. If at the end of any month Toy World has a cash balance in excess of the required minimum level of $200,000, assume it earns interest on the excess at a 4% annual rate during the following month. (To convert an annual interest rate into a monthly interest rate, just divide the annual rate by 12). Similarly, when Toy World is required to borrow funds at the end of any month (when Funds Needed is positive), assume it pays interest on the borrowed funds at a 9% annual rate during the following month.
You are done! Now, we can consider the costs and benefits of moving to level production in a more thorough way. Answer the following questions:
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