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ISSN 1940-204X Let’s Go Aero Travel Trailers

ISSN 1940-204XLet’s Go Aero Travel Trailers: Incorporating the New Modelof the Organization into the Teaching of BudgetingSally WrightUniversity of Massachusetts-BostonINTRODUCTIONU.S. population. According to the U.S. Census Bureau, in2006 baby boomers represented 26% of the populace. Inthat year there were just under 78 million boomers livingin the United States, with the largest populations living inCalifornia, Texas, New York, Florida, and Pennsylvania.Research indicates that for an organization to meet theneeds of the senior market, including baby boomers, thefollowing must be addressed:Let’s Go Aero manufactures travel trailers bought primarilyby young families and retirees interested in a light, low-costtrailer that can easily be pulled by a mid-sized family car. Themarket for travel trailers has expanded nicely over the pastfew years due to the number of families seeking a relativelylow-cost, outdoor vacation experience. But in the view of Let’sGo Aero’s president, Mark Newman, the real growth in thefuture is in the retiree market. Newman believes the vigoroushealth of the average retiree, coupled with the national trendtoward a return to nature, will translate into continuing salesgrowth for Let’s Go. As Newman loves to say, “campingrecently moved from number seven to number six on the listof top 10 leisure activities in the United States, and the babyboomers are getting older every day.”Independence and control,• Intellectual stimulation and self-expression,• Security and peace of mind,• Quality and value.• Seniors respond to benefit-driven messages; to attractthem, advertising has to communicate tangible benefitsrather than features and amenities.THE RETIREE MARKETMARKETING AND SALESBaby boomers (born between 1/1/46 and 12/31/64) carry a lotof consumer clout.According to the National Opinion Research Center atthe University of Chicago, 74% of boomers (aged 47—65)own their own home, 46% are satisfied with their financialsituation, and 56% are married. The spending power ofthis demographic is likely to increase. People who are 50years old and older are expected to inherit an estimated$14 to $20 trillion dollars during the next twenty years.Also, baby boomers make up a significant part of the totalThe forecasted increase in Let’s Go’s sales can be seen in thecompany’s sales projections presented in Exhibit 1 (actual forthe years 2005 through 2010 and projected for the years 2011through 2015). Although the weather can have a significantimpact on the travel trailer industry (i.e., hurricane season,flooding, and even droughts have had negative effects on thesales and rentals of travel trailers), Let’s Go’s managementbelieves these problems will be mitigated in the futureby global warming. All sales projections are done by MarkNewman in his role as Let’s Go’s president.IM A ED U C ATIO NA L C A S E JOURNAL1VOL. 4, N O. 1, ART. 3, MARCH 2011To keep from losing sales, the company maintains finishedgoods inventory on hand at the end of each month equal to 300trailers plus 20% of the next month’s sales. The finished goodsinventory on December 31, 2010, was budgeted to be 1,000trailers. Jim West, Let’s Go’s vice president of marketing andsales, would rather see a minimum finished goods inventoryof no less than 1,500 trailers. Jim refuses to talk to Tom Sloan,Let’s Go’s production manager. Tom is always trying to getJim to consider adopting flexible inventory levels, which Jimis certain would affect his yearly bonus. The vice president ofsales and marketing is eligible for a 20% bonus based on sales.Unfortunately, Jim did not receive a bonus in 2010. Sales wereup, but Mark refused to give Jim the bonus, although it wasearned, due to the high number of customer complaints. Jimwas really steamed when he heard “no bonus.” Didn’t Markknow those complaints were for poor quality? All of Jim’s effortsto grow sales and attract customers were, once again, destroyedby Tom Sloan and his production failures.contract, and her efforts to locate an alternative vendor,willing to accept the conditions of a just in-time contract,have similarly failed. She blames Tom Sloan. Let’s Go’scurrent aluminum vendor refuses to sign a just-in-time primevendor contract due to Tom’s uneven production scheduleand his refusal to pay on time. Tom has been seen readingthe help wanted ads, and Vicky over heard him talking to anemployment agency.In keeping with the policy set by Tom as Let’s Go’sproduction manager, the amount of sheet aluminum on handat the end of each month must be equal to one-half of thefollowing month’s production needs for sheet aluminum.The raw materials inventory on December 31, 2010, wasbudgeted to be 39,000 square yards. The company does notkeep track of work-in-process inventories.Budgeted expenses for Aluminum and other materials,as well as wages, heat, light and power, equipment rental,equipment purchases, depreciation, and selling andadministrative for the first six months of 2011 are given below.TRAILER PRODUCTIONSheet aluminum represents the company’s single mostexpensive raw material. Each travel trailer requires 30square yards of sheet aluminum. The wholesale cost of sheetaluminum varies dramatically according to the time of year.The cost per square yard can vary from $15 in the spring,when new construction tends to start, to $8 in December andJanuary, when demand is lowest.The use of aluminum in vehicles, including traveltrailers, is increasing rapidly due to a heightened need forfuel efficient, environmentally friendly vehicles. Aluminumcan provide a weight savings of up to 55% comparedto an equivalent steel structure, improving gas mileagesignificantly. The aluminum industry and suppliers aredispersed across four-fifths of the country, yet they arelargely concentrated in four regions: the Pacific Northwest,industrial Midwest, northeastern seaboard, and mid-South.Although this is a broad geographic presence, Let’s Go Aerowill be affected by distribution costs.Vicky Draper, Let’s Go’s vice president of purchasingand materials handling, is eager to implement just-in-timeas a way of lowering Let’s Go’s aluminum cost. To offset theexpense of distribution, Let’s Go is located in Pennsylvania.Vicky’s projected 20% bonus, recently announced by Markand effective for year-end 2011, is based on her ability tolower total material cost. Initially enthusiastic about her joband ability to earn a significant bonus, Vicky has becomediscouraged and angry. She is unable to convince Let’sGo’s current aluminum supplier to sign a prime vendorIM A ED U C ATIO NA L C A S E JOURNALAluminum Other materials Wages January February March$816,000$1,056,000$888,00054,000264,000222,000624,000 1,008,000 1,104,000Heat, light, & power 130,000 195,000 220,000Equipment rental 390,000 390,000 390,000300,000 300,000Equipment purchases 300,000 Depreciation 250,000 250,000 250,000Selling & admin 400,000 Aluminum 400,000 400,000April May June$552,000$336,000$240,000Other materials 138,00084,00090,000Wages 672,000 432,000 240,000Heat, light, & power 135,000 110,000 110,000Equipment rental 340,000 340,000 340,000Equipment purchases 300,000 300,000 300,000Depreciation 275,000 275,000 275,000Selling & admin 400,000 400,000 400,000Accounts for aluminum and other materials are paid infull during the month following their purchase. Accountspayable for aluminum and other materials purchased duringDecember, 2010 totaled $850,000 combined. This amountwill be paid in January, 2011.2VOL. 4, N O. 1, ART. 3, MARCH 2011COMPETITIONCASHAll forms of vacation and leisure activities, including themeparks, beach or cabin rentals, health spas, resorts, and cruisevacations compete with Let’s Go Aero Travel Trailers forthe consumer dollar. Other recreational purchases such asautomobiles, snowmobiles, boats, and jet-skis areindirect competitors.Travel trailer manufacturers such as Crossroads RV, Jayco,Coachman RV, and Scamp also offer a moderate-to low-pricedtravel trailer. Manufacturers that offer more diverse productlines such as high-end trailers with luxury accommodationscould compete for the fairly affluent senior market.Coachman RV, a direct Let’s Go competitor, has becomea leader in the recreational vehicle, motor home, and traveltrailer industry through a commitment to quality and valuebased on excellence in engineering and attention to detail.Creative engineering, combined with high-accuracy analysis,reduced material costs at Coachman by more than 60% andlabor costs by 78%.Let’s Go’s vice president of finance, Becky Newman, hasrequested an $800,000, 90 day loan from the bank at a yet tobe determine interest rate. Since Let’s Go has experienceddifficulty in paying off its loans in the past, the loan officerat the bank has asked the company to prepare a cash budgetfor the six months ending June 30, 2011, to support therequested loan amount. The cash balance on January 1, 2011,is budgeted at $100,000 (the minimum cash balance requiredby Let’s Go’s board of directors).HUMAN RESOURCESTo accomplish the company’s corporate strategic goals, Let’s GoAero Travel Trailers encourages upward communication amongall its employees, from senior management to line employees.Decision making, although not an entirely democratic process,is based on a team approach. Newman, as Let’s Go’s president,encourages managers to think in terms of the marketplaceand to look at the business of travel trailers as a whole ratherthan as functional department successes and decisions. Infact, Newman is so committed to the idea of cooperativemanagement and teamwork that he has hired three separatehuman resource consultants in the past six months to lead thecompany’s managers through team-building exercises.BUDGET PREPARATIONTo minimize company time lost on clerical work, Let’sGo’s accounting department prepares and distributes allbudgets to the various departments every six months. PerMark Newman, “Freeing departmental managers fromthe budgeting process allows them to concentrate on morepressing matters.” In keeping with the recently announcedbonus plan for the vice president of purchasing andmaterials handling, Newman has instructed the accountingdepartment to budget aluminum at $8 per square foot. Theaccounting manager recently received a 20% bonus forhaving prepared the budgets on time with little or no helpfrom the other functional areas.PRODUCTION BUDGETREQUIRED1. iscuss the validity and reasonableness of Let’s Go’s saleDprojections.2. repare production, purchasing, and cash budgets for Let’sPGo for the first six months of 2011 using the formats below.(hint: spreadsheet programs are wonderful!):JanFeb March April May June Six MonthsTotal needs ——- ——- ——- ——- ——- ——- ——-Less: beginning inventory——- ——- ——- ——- ——- ——- ——-Budgeted Sales Add: desired ending inventoryTrailer productionIM A ED U C ATIO NA L C A S E JOURNAL3VOL. 4, N O. 1, ART. 3, MARCH 2011PURCHASES BUDGETJanFeb March April May June Six Months——- ——-Trailer production Sheet metal needs per trailer ——- ——- ——- ———- ——- Total production needs Add: desired ending inventory——- ——- ——- ——- ——- ——- ——-Total materials needs Less: beginning inventory ——- ——- ——- ——- ——- ——- ——-Total sheet metal purchases Cost per square yard $____ $____ $___ $____ $____ $____ $____Total cost$ $ $ $ $ $ $CASH BUDGETCash beginning balanceJan$____ Feb March April May June Six Months$____ $____ $____ $____ $____ $____Add: cash collectionsTotal cash availableLess: cash disbursementsxxxxx xxxxx xxxxx Etc.Total cash disbursements—— —— —— —— —— —— ——Excess (deficiency) ____ ____ ____ ____ ____ ____ ____FinancingBorrowings Repayments Interest ____ ____ ____ ____ ____ ____ ____Total financing Cash balance ending $ $ $ $ Discuss the advantages and disadvantages of the budgetsyou have prepared. Who in the company does the budgethelp and whom, potentially, does it hurt. Does the budgethelp or hurt the sales department? What about productionand finance? How are the various functional areas affectedand why?$ $cash budgets should remain as presented in question 2.Use the following approach for the production budget: Discuss the advantages and disadvantages of the secondand third sets of production, purchasing, and cash budgetsyou have prepared. Who within the company do thesebudgets help and whom, potentially do they hurt? Do thesebudgets help or hurt the sales department? What aboutproduction and finance? How are the various functionalareas affected, and why?3. ndy Baxter, newly hired by Let’s Go Aero from aAcompetitor, suggests preparing the production budgetassuming stable production. Prepare a second and thirdset of production, purchasing, and cash budgets. Holdproduction to a constant 3,000 trailers per month for thesecond set of budgets, and 3,500 trailers per month for thethird set of budgets. The format for the purchasing andIM A ED U C ATIO NA L C A S E JOURNAL$ 4VOL. 4, N O. 1, ART. 3, MARCH 2011PRODUCTION BUDGETJanFeb March April May June Six MonthsProduction (trailers)3,000 3,000 3,000 3,000 3,000 3,000 18,000Add: beginning inventory____ ____ ____ ____ ____ ____ ____Total availableLess: budgeted sales____ ____ ____ ____ ____ ____ ____Ending inventory EXHIBIT 1.ACTUAL AND PROJECTED SALES IN NUMBER OF TRAILERSActual sales Projected sales2005 13,765 2011 28,000 2006 2007 2008 14,880 15,991 17,809 2012 2013 2014 33,600 40,320 48,384 4. hat metric should Let’s Go use to measure theW2009 201019,634 23,3222015 58,060 Actual sales in dollars for the last two months of 2010 andbudgeted sales for the first six months of 2011 follow:November 2010 (actual)$1,439,000December 2010 (actual)$2,131,000January 2011 (budgeted)$2,500,000February 2011 (budgeted)$4,000,000March 2011 (budgeted)$5,000,000April 2011 (budgeted) $3,000,000May 2011 (budgeted)$2,200,000June 2011 (budgeted)$1,100,000performance of each manager in this case? What bonussystem would you suggest that incorporates these measuresand also encourages the managers to work as a team?The detail sales for 2010 (actual) and 2011 (projected) bymonth are as follows:2010 Actual 2011ProjectedJanuary1,983 2,500February3,218 4,000March3,981 5,000April3,240 3,000May1,755 2,000June901 1,000July763 1,000August611 1,000September1,622 2,000ABOUT IMAOctober1,678 2,000November1,439 2,000December2,131 2,50023,322 28,000With a worldwide network of more than 60,000 professionals,IMA is the world’s leading organization dedicated toempowering accounting and finance professionals to drivebusiness performance. IMA provides a dynamic forum forprofessionals to advance their careers through CertifiedManagement Accountant (CMA®) certification, research,professional education, networking and advocacy of thehighest ethical and professional standards. For moreinformation about IMA, please visit www.imanet.org.Total number of trailers IM A ED U C ATIO NA L C A S E JOURNALPast experience show that 25% of a month’s sales arecollected in the month of sale, 10% in the month followingthe sale, and 60% in the second month following the sale.The remainder is uncollectible.5VOL. 4, N O. 1, ART. 3, MARCH 2011

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