Play Time Toy Company1

Play Time Toy faces a highly seasonal pattern of sales. In the past, Play Time has
used a seasonal production schedule, where the amount produced each month
matches the sales for that month. Under this production plan, inventory is
maintained at a constant level. The production manager, Thomas Lindop, is
proposing a switch to a level, or constant, production schedule. This schedule
would result in significant savings in production costs but would have higher
storage and handling costs, fluctuating levels of inventories, and would also
have implications for financing. Jonathan King, president of Play Time Toy, has
been reviewing pro forma income statements, cash budgets, and balance sheets
for the coming year under the two production scenarios. Table 1 shows the pro
forma analysis under seasonal production, and Table 2 shows the pro forma
analysis under level production.
Greg Cole, chief financial officer of Play Time, prepared the two tables. He
explained that the pro forma analyses in Tables 1 and 2 take fully into account
the 11% interest payments on the unsecured loan from Bay Trust Company and
the 3% interest received from its cash account. An interest charge of 11%/12 on
the balance of the loan at the end of a month must be paid the next month.
Similarly, an interest payment of 3%/12 on the cash balance at the end of a
month is received in the next month.
The inventory available at the end of December 1990 is $530,000 (measured in
terms of cost to produce). Mr. Cole assumed that this inventory represents a sales
value of $530,000/0.651667 = $813,300.
The inventory and overtime costs in Tables 1 and 2 are based on the cost
information developed by Mr. Lindop. This information is summarized in Table
3.
Mr. Cole further explained how the cost information was used in the pro forma
analyses. For example, in Table 1, the production in August is $1,458,000. The
overtime cost in August is therefore calculated to be $61,000 (=0.15 x (1,458,000
-1,049,000)). Play Time uses LIFO (last-in, first-out) accounting, so overtime costs
are always charged in the month that they occur.2 The annual overtime cost for
the seasonal production plan is $435,000. In Table 2, under level production,
1
From Practical Management Science (2nd ed., Winston and Albright, 2001 Duxbury Press, p.
490-492; Case 9.1).
2
This assumes that overtime production is used only to satisfy current demand and not to build
up inventory.
finished goods worth $5,164,000 are in inventory at the end of July. The
inventory cost for the month is $20,000 (=0.07/12 x (5,164,000 - 1,663,000)). The
annual inventory cost for the level production plan is $100,000.
Mr. Lindop felt that a minimum of $813,300 of inventory (measured in terms of
sales value, or $530,000 measured in terms of cost to produce) must be kept on
hand at the end of each month. This inventory level represents a reasonable
safety stock, required since orders do not occur uniformly during a month.
Mr. King was impressed at the possible increase in profit from $237,000 under
the seasonal production plan to $373,000 under level production. While studying
the pro forma projections, Mr. King realized that some combination of the two
production plans might be even better. He asked Mr. Lindop to try to find a
production plan with a higher profit than the seasonal and level plans.
Mr. Lindop proceeded to develop a spreadsheet-based linear programming
model to maximize annual net profit.

Questions
Note: Mr. Lindop's model is contained in the file playtime.xls. The spreadsheet is
ready to be optimized, but it has not been optimized yet.
1. Run the optimization model in the file playtime.xls. What is the
optimal production plan? What is the optimal annual net profit? How
does this optimal production plan compare to the seasonal and level
production plans?
2. Suppose that Play Time's bankers will not extend any credit over $1.9
million — in other words, the loan balance in any month cannot
exceed $1.9 million. Modify the spreadsheet model to take into account
this restriction. What is the optimal production plan in this case? What
is the optimal annual net profit?
3. Annual profit is a measure of reward for Play Time Toy. The
maximum loan balance is a measure of risk for the bank. Construct a
trade-off curve between optimal annual profit and the maximum loan
balance.

B60.2350 2 Prof. Juran

Table 1: Seasonal Production (Annual net profit = 237)
Actual Projected for 1991
Dec 1990 Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec Total
Production (sales value) 850 108 126 145 125 125 125 145 1,458 1,655 1,925 2,057 1,006 9,000
Inventory (sales value) 813 813 813 813 813 813 813 813 813 813 813 813 813
INCOME STATEMENT Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec Total
Net sales 108 126 145 125 125 125 145 1,458 1,655 1,925 2,057 1,006 9,000
Cost of goods sold
Materials & regular wages 70 82 94 81 81 81 94 950 1,079 1.254 1,340 656 5,865
Overtime wages 0 0 0 0 0 0 0 61 91 131 151 0 435
Gross profit 38 44 51 44 44 44 51 447 486 539 565 350 2,700
Operating expenses 188 188 188 188 188 188 188 188 188 188 188 188 2.256
Inventory cost 0 0 0 0 0 0 0 0 0 0 0 0 0
Profit before int & taxes (150) (144) (137) (144) (144) (144) (137) 259 298 351 377 162 444
Net interest payments 10 2 1 1 2 2 2 3 7 18 19 19 86
Profit before taxes (160) (146) (138) (146) (146) (147) (140) 256 290 333 359 144 358
Taxes (55) (50) (47) (50) (50) (50) (48) 87 99 113 122 49 122
Net profit (106) (97) (91) (96) (97) (97) (92) 169 192 220 237 95 237

Actual Projected for 1991

BALANCE SHEET Dec 1990 Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
Cash 175 782 1,365 1,116 934 808 604 450 175 175 175 175 175
Accts receivable 2,628 958 234 271 270 250 250 270 1,603 3,113 3,580 3,982 3,063
Inventory 530 530 530 530 530 530 530 530 530 530 530 530 530
Net P/E 1,070 1,070 1,070 1,070 1,070 1,070 1,070 1,070 1,070 1.070 1,070 1,070 1,070
Total Assets 4,403 3,340 3,199 2,987 2,804 2,658 2,454 2,320 3,378 4,888 5,355 5,757 4,838
Accts payable 255 32 38 44 38 38 38 44 437 497 578 617 302
Notes payable 680 0 0 0 0 0 0 0 408 1,600 1,653 1,656 966
Accrued taxes 80 25 (24) (151) (232) (282) (363) (411) (324) (256) (143) (21) (4)
Long term debt 450 450 450 450 450 450 425 425 425 425 425 425 400
Equity 2,938 2.832 2,736 2,644 2,548 2,452 2,355 2,263 2,431 2,623 2,843 3,080 3,175
Total liab & equity 4,403 3,340 3,199 2,987 2,804 2,658 2,454 2,320 3,378 4,888 5,355 5,757 4,838

B60.2350 3 Prof. Juran

Table 2: Level Production (Annual net profit = 373)
Actual Projected for 1991
Dec 1990 Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec Total
Production (sales value) 850 750 750 750 750 750 750 750 750 750 750 750 750 9000
Inventory (sales value) 813 1,455 2,079 2,684 3,309 3,934 4,559 5,164 4,456 3,551 2,376 1,069 813
INCOME STATEMENT Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec Total
Net sales 108 126 145 125 125 125 145 1,458 1,655 1,925 2,057 1,006 9,000
Cost of goods sold
Materials & regular wages 70 82 94 81 81 81 94 950 1,079 1,254 1,340 656 5,865
Overtime wages 0 0 0 0 0 0 0 0 0 0 0 0 0
Gross profit 38 44 51 44 44 44 51 508 576 671 717 350 3,135
Operating expenses 188 188 188 188 188 188 188 188 188 188 188 188 2,256
Inventory cost 0 2 6 10 13 17 20 16 11 4 0 0 100
Profit before int & taxes (1501 (147) (143) (154) (158) (161) (158) 304 377 478 529 162 779
Net interest payments 10 3 2 5 10 15 21 26 32 37 31 22 214
Profit before taxes (160) (149) (146) (159) (168) (177) (179) 277 346 441 498 141 565
Taxes (55) (51) (50) (54) (57) (60) (61) 94 118 150 169 48 192
Net profit (106) (99) (96) (105) (111) (117) (118) 183 228 291 329 93 373

Actual Projected for 1991

BALANCE SHEET Dec 1990 Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
Cash 175 556 724 175 175 175 175 175 175 175 175 175 175
Accts receivable 2,628 958 234 271 270 250 250 270 1,603 3,113 3,580 3,982 3.063
Inventory 530 948 1,355 1,749 2,157 2,564 2,971 3,365 2,904 2.314 1,549 697 530
Net P/E 1,070 1,070 1,070 1,070 1,070 1,070 1,070 1,070 1,070 1,070 1,070 1,070 1,070
Total Assets 4,403 3,533 3,383 3,265 3,672 4,059 4,466 4,880 5,752 6,672 6,374 5,924 4,838
Accts payable 255 225 225 225 225 225 225 225 225 225 225 225 225
Notes payable 680 0 0 108 704 1,259 1,900 2,493 3,087 3,693 2,953 2,005 836
Accrued taxes 80 25 (25) (155) (240) (297) (389) (450) (355) (269) (119) 50 66
Long term debt 450 450 450 450 450 450 425 425 425 425 425 425 400
Equity 2,938 2,832 2,734 2,637 2,533 2,422 2,305 2,187 2,370 2,599 2,890 3,218 3,311
Total liab & equity 4,403 3,533 3,383 3,265 3,672 4,059 4,466 4,880 5,752 6,672 6,374 5,924 4,838

B60.2350 4 Prof. Juran

Play Time Cost Information
 Gross margin. The Cost of goods sold (excluding overtime costs) is 65.1667% of
sales under any production schedule. Materials costs are 30% of sales. All other
non-materials costs, including regular wages but excluding overtime wages, are
35.1667% of sales.
 Overtime cost. Running at capacity but without using any overtime, the plant
can produce $1,049,000 of monthly sales. Units produced in excess of this
capacity in a month incur an additional overtime cost of 15% of sales. (The
monthly production capacity of the plant running on full overtime is $2,400,000
of sales. Since November has the maximum level of projected sales at $2.057.000,
the capacity on full overtime should never pose a problem.)
 Inventory cost. The plant has a limited capacity to store finished goods. It can
store $1,663,000 worth of sales at the plant. Additional units must be moved and
stored in rented warehouse space. The cost of storage, handling, and insurance of
finished goods over this capacity is 7% of the sales value of the goods per year, or
7%/12 per month.

B60.2350 5 Prof. Juran