Final answer:
The title 'Toy Story' in the sentence should be capitalized as it is the proper title of a movie. Important words in titles should be capitalized according to MLA style guidelines.
Step-by-step explanation:
The word that needs to be capitalized in the sentence 'The local elementary school is organizing a screening of the movie toy story as fund-raiser' is the title of the movie. According to MLA style guidelines for capitalization in titles and subtitles, the proper way to present the title would be 'Toy Story'. Therefore, both words in the movie title should be capitalized, and the title should be italicized if possible when written in text.
Moreover, when referring to titles of movies, books, plays, and other works of art, it is standard to capitalize the first and last words of the title, as well as any other important words, excluding articles, coordinating conjunctions, and prepositions unless they are the first or last word in the title.