Operational Decisions for Tinker's Toys: A Small Business Analysis

Overview of Tinker's Toys

Tinker's Toys is a small toy manufacturer that specializes in a niche market. It creates hand-crafted wooden toy model sets with gears and motors. The sets are sold for the end user to assemble, and the finished products replicate old-fashioned wooden toys in both their look and movements. Tinker's Toys has been in business for the last fifteen years and markets primarily to small model shops and educational toy retailers. It does not have any large customers such as Hobby Lobby, Michael's, or Toys R Us. It does not have an online retail direct-marketing presence, but does manage some of its wholesale sales online. Tinker's Toys' main competition was a firm called Wooden Wonders, but Wooden Wonders expanded quickly just prior to the recession and then closed in late 2011.

Environmental scanning is "the acquisition and use of information about events, trends, and relationships in an organization's external environment, the knowledge of which would assist management in planning the organization's future course of action. Organizations scan the environment in order to understand external forces of change so that they may develop effective responses which secure or improve their position in the future" (Choo, 1999). Therefore, the organization must look at both internal and external factors to determine the business environment.

Environmental Scan Factors

Many businesses consider the economy to be the most significant environmental factor in business decisions. This may be true for a firm with no resources to weather economic cycles, but in an organization that has some resources, losses in a down economy do not necessarily dictate that the business be closed. On the contrary, long-term economic decision-making may benefit from keeping a company running, even at a loss, during a slow economic cycle. Demand for hobby toys has been down as a result of the recession, but with the economy slowly recovering, orders for the toys have been increasing again. A key competitor closed because of the economic downturn, which places Tinker's Toys in a favorable position to increase market share as the economy recovers.

Social and cultural trends suggest a strong market for Tinker's Toys. A strong nostalgic sentiment within a large segment of the American population presents a marketing opportunity. By advertising these toys as nostalgia pieces, it should be possible for Tinker's Toys to capitalize on these feelings. Moreover, the toys appeal to hobbyists and enthusiasts who enjoy building mechanical parts. While that demographic was long marginalized by mainstream culture, it is experiencing something of a cultural resurgence. The most popular sitcom on network television at the time, The Big Bang Theory, features a group of self-described nerds, and the broader societal stigma once attached to academically inclined hobbies appears to be waning.

Government trends are a significant factor for a small business. The healthcare mandate will have a financial impact: beginning in 2014, the business would be required to provide healthcare coverage for all employees. Insurance premiums cannot cost the employee more than 9.5% of salary and must cover at least 60% of healthcare expenses. However, the actual costs of that insurance had not yet been fully determined, as legal disputes over the healthcare laws and insurance company responses to those laws were still unresolved at the time of this analysis. Those expenses were not expected to directly impact the next fiscal operating year.

The monthly operating expenses for the firm include wages and fixed costs. With 100 workers working 20 days per month at $70 per day, total monthly wages are calculated as follows: 100 × 20 × 70 = $140,000. Other costs are $2,000 per day over 20 days: 2,000 × 20 = $40,000. The firm's total monthly operating expenses are therefore $180,000. The firm produces 6,000 units at $32 per unit, generating revenue of 6,000 × $32 = $192,000. This appears to leave a monthly profit of $192,000 − $180,000 = $12,000. However, information from the firm indicates that fixed costs are high enough that total costs exceed total revenue. This means fixed costs exceed $12,000 per month.

Financial Performance

The marginal cost of the last unit produced is $30, which at a selling price of $32 suggests a $2 profit on the last item produced. We can assume a similar profitability level for each additional unit produced beyond the current level, although this calculation depends on total fixed costs — a figure that has not been supplied. Currently, 100 workers producing 6,000 units over 20 working days means each worker produces 6,000 ÷ (100 × 20) = 3 units per day.

Given only those financial figures that have been provided, it is impossible to complete a full financial calculation. A critical part of the decision-making for this scenario depends upon the marginal cost of additional production. Marginal cost refers to the cost of producing one more unit of a product (Sullivan & Sheffrin, 2003). In economies of scale, greater production typically lowers marginal cost, so that increasing production increases profit. However, there is insufficient information to determine whether this holds for Tinker's Toys, and if so, to what level of production it would apply.

Without knowing the fixed costs and worker capacity, it is impossible to determine some critical financial figures. Can workers reasonably increase production, or is 3 units per day the maximum sustainable output with the current workforce? How high are fixed costs? Would an additional $10,000 in orders be sufficient to cover fixed expenses, or is the company losing tens of thousands in fixed costs each month? If so, where do those fixed costs lie, and can they be reduced? Without answers to these questions, it is impossible to make firm recommendations about improving profitability. However, assuming that marginal costs decline with increased production and that there is potential for increased profit, the following measures are recommended: profit mapping; identifying customers who should be in the company's "sweet spot" but are not and focusing sales efforts on those customers; and implementing a net profitability-based sales compensation system (Byrnes, 2011).