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Polar Sports

Polar Sports, Inc. manufactures skiwear and is considering shifting from a seasonal production schedule to level production. Seasonal production requires less financing and inventory but has higher operating costs. Level production would reduce costs but require more financing and carry inventory risks. An analysis shows level production could save $406,518 annually after additional interest, storage costs and taxes. It is recommended Polar Sports adopt level production given the significant savings, though it would take more financing and carry inventory risks. Key factors to consider are the company's ability to finance production and convince banks of its financial strength.

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441 views15 pages

Polar Sports

Polar Sports, Inc. manufactures skiwear and is considering shifting from a seasonal production schedule to level production. Seasonal production requires less financing and inventory but has higher operating costs. Level production would reduce costs but require more financing and carry inventory risks. An analysis shows level production could save $406,518 annually after additional interest, storage costs and taxes. It is recommended Polar Sports adopt level production given the significant savings, though it would take more financing and carry inventory risks. Key factors to consider are the company's ability to finance production and convince banks of its financial strength.

Uploaded by

jordanstack
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Polar Sports, Inc

Dr. Ujjwal Mishra


Prof. A. C. Panda

1. Overview/Facts
Polar 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 Overview
The 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 market
As 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 failure

3. Problem Statement
Should the management consider to shift

level production method from seasonal


scheduling production Method

4.Objective
Understanding 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. Alternative
To consider for Level production Method
To follow the Existing, Seasonal Production

scheduling Method
To consider both the methods

Criteria
Risk of profitability and Liquidity
Source of Sort term financing and risk

exhibits)
Seasonal Production

a)
b)
c)
a)

Pros:
Requires minimum short term
financing
Less risk
Less inventory holding
Cons:
Increases operating Cost

Level Production

Pros:
a) Reduces operating cost

Cons:
a) Requires more short term financing
b) High risk
c) High Inventory Holding.

Analysis
Net Savings From Level Production
Overtime wage premiums

480,000

Other direct labor savings


Net savings before financial charges, carrying costs,
inventory losses, and taxes

600,000
1,080,000

Increase in interest expenses

147,923

Reduction in interest income

16,140

Increase in storage cost

300,000

Net pretax savings

615,937

Less tax at 34%

209,418

Net savings

406,518

7. Suggestion
From 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 away


Analysis of Financial statements
Divergence in Accounting Income and cash

flow

Questions for Discussion


What factors must be considered by Mr. Weir
for deciding, whether to adopt Level production?

Solution:
1.
2.

3.

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 Production
1. Overtime wage premiums 480,000
2. Other direct labor savings 600,000
3. 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 risk

Solution:
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: Bank

Can

the company able to finance its production


activity

Solution:
1.

2.

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

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