Operating Total Toy – Transactions’ Details
To keep things as simple as possible, suppose operating Total Toy consists of a few simple steps. First, dolls are purchased from a supplier. This is a cash purchase, as the supplier never lets its customers buy on account.
Second, dolls are placed in Total Toy’s inventory, where they sit for one month before being sold. All sales to customers are on account, with payment received in cash one month after the sale.
Third, cash is collected from customers one month after their purchase.
Operating Total Toy – Retail Doll Market
Demand for Total Toy’s dolls lasts for one year and will evolve over three phases: growth, steady state, and decline. In the growth phase, demand starts at 0 and grows by 600 dolls per month until it reaches 1,800, where it remains for 6 months. This period of constant demand is the steady state. After 6 months of this steady state, demand declines by 600 per month until it reaches 0.
Operating Total Toy – Wholesale Market
Of course, Total Toy must acquire the dolls it sells to customers and must hold them in inventory for one month. There is no advantage to stocking excess inventory, therefore Total Toy’s purchasing policy woud be to buy inventory one month ahead of when it is to be sold.