POLAR SPORTS COMPANY Harvard Case Solution & Analysis

Polar Sports: Case questions

Which factors should Mr. Weir consider in deciding whether to adopt level production?

In theIndustry of Ski clothing, thedesign and manufacturing hasbecome a very competitive business and also the industry comprises of big players.Apart from them, now major brands have also entered in the market, which includeParades, Gucci and Armani, whichare designing technical Skiwear andSki-gear.

The only way to gain competitive advantage in this industry is by designing innovative styles and fabrics, but thiswill also only last for a limited time i.e. often one yearand after that usual first yearthe competitors are usually able to copy and replicate the production. Many companies have moved their production facilities tolower labor cost regions as this industry is very labor intensive. Because of thisstrategic move the companies are able to achieve low pricing, and hence can strive for a higher market share.

In such an industry where cost cutting is the only means to achieve long term and sustainable competitive advantage, Mr. Weir should evaluate all the options he has, and follow those options/alternatives which would enable him to run the company in a more cost effective manner.

As new and innovative designs only last for a year before they get copied/ infringed by the competition then in such a competitive environment, cost efficiency is the only viable option to achieve a level production.

What are the total savings from adopting level production?

Using the parameters defined in the case which were proposed by the new vice president of operations Mr. Thomas Johnson,a forecasted income statement and balance sheet were made.

As it was said that the company would be saving $600,000 over training cost and reduced hiring along with $480,000 by reducing overtime premiums and reducing maintenance costs of the company, the effect of which was taken by considering the COGS to be 60% of sales rather than 66% as done previously.

There will be an additional cost that was to be incurred by the company, i.e.$300,000 because of increased storage and handling of the excess inventory; operating expense was taken to be the same that was 24% of sales evenly distributed over theentire year, interest expense was taken over $1million long term debt for the first 6 months, then $950,000 for the remaining 6 months as the payment of $50,000 would be made during the year, andinterest rate was considered to be 8%.

Profit for the year was $1.65million under the level production approach, whereas the profit was $1.14million using the seasonal approach, a gain of $504,000was achieved using the level approach. In a competitive market where the competition is intense and companies are trying to edge ahead on the bases of cost cutting this figure is very encouraging.

Use the excel spreadsheet to prepare pro forma income statements, balance sheets to estimate the amount of funds required and timing of the nodes under level production.  Does Polar need more than $4 million to finance level production? Why or why not?

To determine the need to finance the company a balance sheethas been made where the property, plant and equipment act as the balancing figure showing the additional equipment required by the company which would show the additional financing required.

The cash figure and the account receivable figure are determined by taking the assumption that the 30% of sales in current month will be on cash, whereas the remaining 70% will be on credit, the value of closing inventory will be calculated by taking opening inventory minus purchases which are considered to be 50% of the cost of goods sold and minus the cost of goods sold to get the figure of closing inventory, the total of cash, account receivable and inventory gives the current assets for the month.

Account payableis taken as 50% of the cost of goods sold; which is created due to the purchases made for the material, accrued taxes are calculated by adding tax for the month into opening balance of tax, shareholders equity is calculated by adding current month’s profit to the opening balance.

The property, plant and equipment was taken as the balancing figure which for the month of January stands at $5.9 million minus the opening balance of $2.9million, the company would require an investment of $3million regarding property plant and equipment to be able to implement the level production plan.

Compare the liability patterns feasible under the alternative production plans.  What implications do their difference have for the risk assumed by the various parities?

The company has an outstanding loan of $826,000,which the bank is willing to extend to $4million,meaning an additional amount of $3.174million the company can receive.Since this amount exceeds the $2million threshold, the bank will charge 11% interest on the company along with the $1million long term bonds that the company has issued whose repayment is made in $50,000 re-payments in June and December of each year; however, the company is still paying 8% interest on that...............

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