• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Learning Team Assignment: Xtreme Toys Case Study

Extracts from this document...


Learning Team Assignment: Xtreme Toys Case Study Nathan Church Megan Leite-Ferraz David Oxley Sue Oxley Michael Shannon FIN 475 March 24, 2004 Xtreme Toys Case Study Imagine the excitement of the management team at Xtreme Toys at their recent board meeting when told about the company's increased sales statistics. However, joy soon turned to bewilderment when confronted by the company's shrinking cash flow situation. Convinced that the figures must have been misstated, the board members appointed a team from the finance accounting department to investigate. The following paper details the team's findings, including their recommendations on what actions the company should adopt to reduce its cash gap predicament. The Situation Xtreme Toys is a small manufacturing company in Southern California that has experienced rapid expansion in sales over the past year. The expanding sales have caused intense pressure for increased inventory production, combined with a receivables buildup that is now draining the company of its cash resources. With management focused on increasing sales as the best way for the company to prosper, insufficient resources were dedicated to working capital management. ...read more.


Rather than look to historical data to set perceived desirable levels, the decisive test should be one of receiving the best return for outlay. The current 62 days it is taking for customers to pay is simply too long. One solution that presented itself is to encourage customers to pay earlier by offering an incentive of a cash discount for early payment. However, even offering a 2% discount for payment within 30 days would equate to an annualized discount far greater than the company's current 8% cost of financing. Consequently, after analysis we would not recommend that course of action. However, customer accounts that remain delinquent beyond 30 days could have a penalty of 8% imposed on them. The 8% is a means by which the company's financing costs are passed directly to the late paying customers. Alternatively, to circumvent the delay entirely, the company could factor receivables to a finance company. Factoring would transfer any risks of possible customer defaults and high administrative costs, and would enable quick transfer of cash into the company accounts. ...read more.


As identified in the commentary and analysis in the body of this paper, if the company: * Stretches accounts payable from an average of 40 to 50 days, this will immediately achieve half of the cycle day target. Of course, the team proposes that any supplier concerns are addressed through consultation and communication to ensure continued good terms with key suppliers. * Secondly, a 5 to 10 day reduction in the average time accounts payable remain outstanding should be achieved by providing an incentive for customers to pay early. A key objective will be to reduce accounts receivable delays to something less than accounts payable. * Finally, by looking closely at production options, the team believes the most worrying 113-day average inventory carrying time could be significantly reduced. The project team calculates that by implementing the recommended changes, at least to the extent of a 20-day improvement, will save the company $29,778 annually in financing charges. Additionally, as if the finance charges were not sufficient, the cash conversion cycle time reduction will also free up nearly $400,000 in lines of existing credit that can potentially be deployed to improve production and/or increase sales. Xtreme Toys 1 ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our GCSE Accounting & Finance section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related GCSE Accounting & Finance essays

  1. Hampton Machine Tools Company Case

    181 181 Expenses 400 400 400 400 Fixed asset outlay 350 Purchases 948 600 600 600 First Loan 300 200 200 300 Second loan 350 Dividends 0 Total Disbusements 1844 1565.75 1212.75 1840.75 Net Cash flow -1160 107.25 -433.75 -236.75 Beginning Cash 1559 399 506.25 72.5 Ending Cash 399 506.25 72.5 -164.25 Required financing 0 0 0 164.25 Exhibit B.4.

  2. Wilson Lumber Company Case

    0 0 0 0 Required Financing 0 0 0 0 0 3186.412 3593.365 4000.318 4148.248 4481.21 4814.172 13397.13 Total Required Financing 37620.86 Cash Budget (with borrowings, 2.091 million sales) January February March April May June July August September October November December Cash Receipts Sales 156825 156825 191675 191675 191675 191675

  1. Comsat case

    This is due to greater degrees of risk for different types of investments. Comparable Companies When a company has not used debt financing to determine a cost of debt, instead of using the risk-free rate as a substitute, a firm can look to comparable companies as a possible alternative.

  2. Enron Case Analysis

    [2] On December 2, 2001, Enron filed for chapter 11 bankruptcy. They were the largest corporate bankruptcy in the world (until WorldCom one year later). [3] There were many factors that led up to this huge collapse of one of the largest electric companies in the world.

  1. Management Accounting Report.

    Method (Budgetary control part B) To make this task easer to understand I am going to use: * Master budget at actual price * Cash flow forecast at actual price * Sales budget at actual price Findings (Budgetary control part B)

  2. Financial Analysis of Matalan PLC

    The finance leases are depreciated over the shorter of the lease terms and the useful lives of equivalent owned assets, as is in accordance with SSAP 21. There is some subjectivity here as the firm can choose the life of the lease.

  1. Costs, Profits and Break-even Analysis.

    The precise level of this will vary in different firms and industries. They have to balance the costs of holding stocks (the space taken, the money tied up etc.) with the costs of ordering stock. The more firms order at once, the better the deal they will usually get.

  2. Unit 5 Introduction to Accounting

    Analyse the cash flow problems a business might experience. If a business would have more outflows than inflows, they will have a serious problem and will end up in a negative balance. It means that they will have insufficient cash to meet the payments that are due. They clearly need to avoid this problem.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work