ZODIAC BROS. TOYS, INC.

(B)1

Question 1 The main factors under consideration while analyzing the level vs Expansion strategy from quantitative perspective are as follows: a) Transportation cost of Molded parts to warehouse b) Transportation cost of Finished Goods to warehouse c) Cost of leasing space Molded parts d) Cost of leasing space Finished Goods e) Cost of Holding inventory f) Capital investment for land and building new facility From Exhibit-1, Expansion strategy, we can see that the total cost exclusive of capital investment and additional Fab/Assembly comes out to be 1.4 Million. The inventory holding cost is around 1.06 Million. The next highest cost incurred is for transportation of molded parts inventory to the warehouse. For this we first calculated the area required for holding the inventory which is given in sales million dollars. The calculation is shown in Exhibit-3. We have in-house warehouse space of 631,000 sq. ft to hold molded parts. We calculated monthly no. of pallets which cant be stored in inhouse space and have to be transported to leased warehouse which costs $0.50/pallet/month. The warehouse lease is at minimum for a year so we leased based on the maximum pallets to be stored in the year. We assumed the same warehouse leasing cost/pallet for molded parts as is for finished goods pallets. The maximum molded part inventory is built up in June i.e 16100 pallets. The transportation by truck costs $0.023/pallet/mile. To calculate the distance for transportation, we averaged the distance of leased facility from all four production facilities assuming that the new facility is built in Baraboo, located 45 miles from West bend. The average distance is 48.75 miles

The names and figures in this case have been disguised.

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(195/4 miles i.e Leased Warehouse is 25 miles from West Bend, 35 Miles from Hartford, 65 Miles from Portage and 70 miles from Baraboo). In case of transportation of molded parts, we considered two trips, one going to the warehouse for storage and one back to the production facility for final fabrication and assembly. Similarly, we calculated the transportation and warehouse leasing cost for finished goods inventory. In this case there is only one trip to the warehouse. Exhibit-2 shows the evaluation of above mentioned parameters for level production. The total cost for this option is around 2.5 Million, 1.1 Million more than the expansion strategy. The inventory holding cost is 1.6 Million. It is due to high build up of finished goods inventory. We see that for level production, we have enough in-house space for molded parts inventory so no transportation or leased warehouse cost is incurred for molded parts inventory. There is excessive 106,000 sq. ft space which can be used for storing the finished goods inventory. Again we calculated the number of finished goods pallets which could not be stored in-house and have to be transported to leased warehouse. Exhibit 7 shows the cost differential of additional space in setting up Injection Molding Presses and Number of Fabrication/Assembly lines for each of the eight classes of toys. The expansion strategy would cost an additional $3.15 Million to meet the production capacity demands in 1994 compared to $2.57 Million additional required for Level Production. The increase cost in production for the expansion strategy, however is more than offset by the savings in Transportation and Warehouse capacity, as discussed earlier. Based on the difference of cost for both strategies, it is best for Zodiac to build another facility which would indeed cost 4.4 Million for land, building and additional Fab/assembly lines but the annual savings of 1.1 Million will recover the capital investment in few estimated 5-6 years.

Some quick thoughts for quantitative analysis:

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1- Expansion strategy will give the company presence is another geographic location and help the distribution. 2- Retain companies image as public spirited corporation trying to make contribution to the community 3- Availability of skilled workforce Etc.

Question 4 Exhibit 4-6, show the calculations for economic analysis of subcontracting molding versus bringing molding in-house by buying more molding presses. Based on the quantitative analysis, it makes sense to bring molding in house by buying additional 128 injection and 39 blow molding presses. The total capital investment of buying presses, installing presses in the warehouse and building new site for Fab/assembly in Hartford & Protage is around 15.4 Million (Exhibit-6). The annual savings on labor cost by bringing the presses in house compared to subcontracting cost is around 5.5 Million. The breakeven time on this capital investment is little than 3 years. Thereafter there are cost savings subcontracting molding. For these calculations, first we calculated the proportional increased volume of different toy classes based on 1994 forecasted sale of $240 Million (Exibit-4). From there we calculated total machine hours of injection and blow presses to produce molded parts to support forecasted sales volume (Exhibit-5). We calculated the Labor cost plus overhead costs, but excluding material costs for these 128 injection and 39 blow molding presses in Exhibit-6.

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Exhibit-1

Exhibit-2

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Exhibit-3 Molded parts Inventory Balance in June = 51 Million of sales Cost of molded parts = 1/4 of sales No. of pallets = cost of molded parts/$100 pallet Space required to hold this inventory = [No. of pallets] x [40 sq. ft./pallet/4 pallet high] = (51M/400)x(40/4) = 1275,000 sq. ft Space in-house = 631,000 sq. ft Leased space required = 1275,000 631,000 = 644,000 No. of pallets = 644,000sq. ft./40 sq.ft = 16100 pallets Exhibit-4

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Exhibit-5

Exhibit-6

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Group Members: Andrew Cuppia Ashish Gupta Bilal Sipra

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