Polar Sports, Inc
Dr. Ujjwal MishraProf. A. C. PandaPolar Sports, Inc1.
Overview/FactsPolar sports, Inc. is into fashion skiwear
manufacturing business, which is seasonal and very short product
life.As the products are seasonal the company follows seasonal
production scheduling method. Now the company wants to shifts to
level production method, which will reduce the cost but uncertain
about the impact on other aspects of the busies (i.e. Risk,
Liquidity & Financing)2. Industry OverviewThe Ski apparel
business is a seasonal business, it is highly competitive and very
low product life.North Face, Burton, Karbon, Spyder Active Sports,
Sports obermeyer, Parda and Giorgio are the major player in the
apparel marketAs the Market is highly competitive, some players
have shifted their production to Asia and Latin America.Due to High
competition in both designing and pricing, there is a high rate of
company failure3. Problem StatementShould the management consider
to shift level production method from seasonal scheduling
production Method4.ObjectiveUnderstanding and interpretation of
financial statements (Income statement, Balance sheet & Cash
flow statement)To analyze the profitability and liquidity aspects
of the firm.To estimate the funds required for a change in
production method.
5. AlternativeTo consider for Level production MethodTo follow
the Existing, Seasonal Production scheduling MethodTo consider both
the methodsCriteria
Risk of profitability and LiquiditySource of Sort term financing
and risk
Analysis (as per original case exhibits)
Seasonal ProductionLevel ProductionPros:Requires minimum short
term financingLess riskLess inventory holding Pros: Reduces
operating cost Cons:Increases operating CostCons:Requires more
short term financingHigh riskHigh Inventory Holding.AnalysisNet
Savings From Level ProductionOvertime wage premiums480,000Other
direct labor savings600,000Net savings before financial charges,
carrying costs, inventory losses, and taxes1,080,000Increase in
interest expenses147,923Reduction in interest income16,140Increase
in storage cost300,000Net pretax savings615,937Less tax at
34%209,418Net savings406,5187. SuggestionFrom the above analysis,
it shows that the company can save around $ 406,518 if the company
follows Level production method, instead of Seasonal Production
Method.Hence the company should follow the level production
Method
Key Take awayAnalysis of Financial statementsDivergence in
Accounting Income and cash flowQuestions for Discussion
What factors must be considered by Mr. Weir for deciding,
whether to adopt Level production?
Solution:Net saving from level production $406518 /-The
difference in profit between two production Plans $ 1553141 /-
under Level Production & 1146623 under Seasonal
Production.Level production reduces COGS from 66 % to 60 %
Find out the total savings, if Level production is adopted
Solution:Total Savings From Level Production1. Overtime wage
premiums 480,0002. Other direct labor savings 600,0003. Total
savings before financial charges, carrying costs, inventory losses,
and taxes 1,080,000
Does increased net income justifies the potential risk that may
arise due to increase in riskSolution:Yes, The net Income Justifies
the Potential risk, which is arising from the peak Inventory level
of $ 6,483,000 in the month of August.Financing Risk: BankCan the
company able to finance its production activitySolution: Yes Mr.
Weir has to convince the Bank regarding companies financial
strength, as it absorbs substantial inventory losses and still
repay the bank in Jan next year.Substitute of Bank credit is Polar
could ask its trade suppliers for terms longer than 30 days, i.e.
90 days credit term Purchases which will help the company to
generate around 90000
