Action Adventures
The Adventure Toys Company manufactures a popular line of actionfigures and distributes them to toy stores at the wholesale priceof $10 per unit. Demand for the action figures is seasonal, withthe highest sales occurring before Christmas and during the spring.The lowest sales occur during the summer and winter months.
Each month the monthly \"base\" sales follow a normaldistriÂbution with a mean equal to the previous month's actual\"base\" sales and with a standard deviation of 500 units. The actualsales in any month are the monthly base sales multiplied by theseaÂsonality factor for the month, as shown in the subsequenttable. Base sales in December 2018 were 6,000, with actual salesequal to (l.18)*(6,000) = 7,080, It is now January I, 2019.
| MONTH | SEASONAL FACTOR |
| JANUARY | 0.79 |
| FEBRUARY | 0.88 |
| MARCH | 0.95 |
| APRIL | 1.05 |
| MAY | 1.09 |
| JUNE | 0.84 |
| JULY | 0.74 |
| AUGUST | 0.98 |
| SEPTEMBER | 1.06 |
| OCTOBER | 1.1 |
| NOVEMBER | 1.16 |
| DECEMBER | 1.18 |
Cash sales typically account for about 40 percent of monthlysales, but this figure has been as low as 28 percent and as high as48 percent in some months. The remainder of the sales are made on a30-day interest-free credit basis, with full payment received onemonth after delivery. In December 2018, 42 percent of sales werecash sales and 58 percent were on credit.
The production costs depend upon the labor and material costs.The plastics required to manufacture the action figures fluctuatein price from month to month, depending on market conditions.Because of these fluctuations, production costs can be anywherefrom $6 to-$8 per unit. In addition to these variable productioncosts, the company incurs a fixed cost of $15,000 per month formanufacturing the action figures. The company assembles theproducts to order. When a batch of a particular action figure isordered, it is immediately manufactured and shipped within a coupleof days.
The company utilizes eight molding machines to mold the actionfigures. These machines occasionally break down and require a$5,000 replacement part. Each machine requires a replacement partwith a 10 percent probability each month.
The company has a policy of maintaining a minimum cash balanceof at least $20,000 at the end of each month. The balance at theend of December 2018 (or equivalently, at the beginning of January2019) is $25,000. If required, the company will take out ashort-term (one-month) loan to cover expenses and maintain theminimum balance. The loans must be paid back the following monthwith interest (using the current month's loan interest rate). Forexample, if March's annual interest rate is 6 percent (so 0.5percent per month) and a $1,000 loan is taken out in March, then$1,005 is due in April. However, a new loan can be taken out. eachmonth.
Any balance remaining at the end of a month (including theminimum balance) is carried forward to the following month and alsoearns savings interest. For example, if the ending balance in Marchis $20,000 and March's savings interest is 3 percent per annum (so0.25 percent per month), then $50 of savings interest is earned inApril.
Both the loan interest rate and the savings interest rate areset monthly based upon the prime rate. The loan interest rate isset at prime + 2%, while the savings interest rate is set at prime- 2%. However, the loan interest rate is capped at (can't exceed) 9percent and the savings interest rate will never drop below 2percent.
The prime rate in December 2018 was 5 percent per annum. Thisrate depends upon the whims of the Federal Reserve Board. Inparticular, for each month there is a 70 percent chance it willstay unchanged, a 10 percent chance it will increase by 25 basispoints (0.25 percent), a 10 percent chance it will decrease by 25basis points, a 5 percent chance it will increase by 50 basispoints, and a 5 percent chance it will decrease by 50 basispoints.
a. Formulate a simulation model on a spreadsheet to track thecompany's cash flows from month to month. Use Analytic Solver tosimulate 1,000 trials for the year 2019.
b. Adventure Toys management wants information about what thecompany's net worth might be at the end of 2019, includÂing thelikelihood that the net worth will exceed $0. (The net worth isdefined here as the ending cash balance plus savings interest andaccount receivables minus any loans and interest due.) Display theresults of your simulation run from part a in the various formsthat you think would be helpful to management in analyzing thisissue.
c. Arrangements need to be made to obtain a specific creditlimit from the bank for the short-term loans that might be neededduring 2019. Therefore, Adventure Toys management also would likeinformation regarding the size of the maximum short-term loan thatmight be needed during 2019. Display the results of your simulationrun from part a in the various forms that you think would behelpful to manageÂment in analyzing this issue.
