Polar Sports, Inc is located in Littleton, Colorado where it manufactures fashion skiwear. The production of skiwear

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Question:

Polar Sports, Inc is located in Littleton, Colorado where it manufactures fashion skiwear. The production of skiwear has a unique design where they use special synthetic material that improves insulation and durability. In order to develop market share in a competitive industry Polar Sports, Inc must develop new fabrics and use innovative patterns. Between September and January the company generates over 80% of sales and they depend on seasonal production to respond on time to customers orders.

Throughout these months Polar Sports, Inc must quickly increase production by hiring and training additional workers, meaning that they often pay them overtime. There have been some concerns from the vice president of operations regarding the costs associated with seasonal production and therefore presents a suggestion to switch to level production. This proposal can reduce costs and improve efficiency but it can also affect other aspects of company finance.

Requirements:

1. What is total saving from adopting level production?

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

3. Think about the concern of Polar’s bank. As the banker, would you be willing to extend the line of credit of more than $4 million to finance level production? Why or why not?

4. What other source could substitute in part for bank lending if the lender is not willing to extend the present line of credit?

Change in liabilities? If they switch to level production

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

6. What would be the impact of unsold inventory on cash flows and projected cost savings?