This project is adapted from Let's Go Aero Travel Trailers: Incorporating the New Model of the Organization
Question:
INTRODUCTION
Let's Go Aero manufactures travel trailers bought primarily by young families and retirees interested in a light, low-cost trailer that can easily be pulled by a mid-sized family car. The market for travel trailers has expanded nicely
over the past few years due to the number of families seeking a relatively low-cost, outdoor vacation experience. But in the view of Let's Go Aero's president, Mark Newman, the real growth in the future is in the retiree market. Newman believes the vigorous health of the average retiree, coupled with the national trend toward a return to nature, will translate into continuing sales growth for Let's Go. As Newman loves to say, "camping recently moved
from number seven to number six on the list of top 10 leisure activities in the United States, and the baby boomers are getting older every day."
THE RETIREE MARKET
Baby boomers (born between 1/1/46 and 12/31/64) carry a lot of consumer clout.
According to the National Opinion Research Center at the University of Chicago, 74% of boomers (aged 4765) own their own home, 46% are satisfied with their financial situation, and 56% are married. The spending power of this
demographic is likely to increase. People who are 50 years 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 total U.S.
population. According to the U.S. Census Bureau, in 2006 baby boomers represented 26% of the populace. In that year there were just under 78 million boomers living in the United States, with the largest populations living in
California, Texas, New York, Florida, and Pennsylvania.
Research indicates that for an organization to meet the needs of the senior market, including baby boomers, the following must be addressed:
Independence and control,
Intellectual stimulation and self-expression,
Security and peace of mind,
Quality and value.
Seniors respond to benefit-driven messages; to attract them, advertising has to communicate tangible benefits rather than features and amenities.
COMPETITION
All forms of vacation and leisure activities, including theme parks, beach or cabin rentals, health spas, resorts, and cruise vacations compete with Let's Go Aero Travel trailers for the consumer dollar. Other recreational purchases
such as automobiles, snowmobiles, boats, and jet-skis are indirect competitors.
Travel trailer manufacturers such as Crossroads RV, Jayco, Coachman RV, and Scamp also offer a moderate-to low-priced travel trailer. Manufacturers that offer more diverse product lines such as high-end trailers with luxury
accommodations could compete for the fairly affluent senior market.
Coachman RV, a direct Let'sGo competitor, has become a leader in the recreational vehicle, motor home, and travel trailer industry through a commitment to quality and value based on excellence in engineering and attention to
detail. Creative engineering, combined with high-accuracy analysis, reduced material costs at Coachman by more than 60% and labor costs by 78%.
MARKETING AND SALES
The forecasted increase in Let's Go's sales can be seen in the company's sales projections presented below.
Actual sales
2005
2006
2007
2008
2009
2010
13,765
14,880
15,991
17,809
19,634
23,322
Projected sales
2011
2012
2013
2014
2015
28,000
33,600
40,320
48,384
58,060
The detail sales for 2010 (actual) and 2011 (projected) by month are as follows:
Actual sales in dollars for the last two months of 2010 and budgeted sales for the first six months of 2011 are shown below.
Past experience show that 25% of a month's sales are collected in the month of sale, 10% in the month following the sale, and 60% in the second month following the sale. The remainder is uncollectible.
Although the weather can have a significant impact on the travel trailer industry (i.e., hurricane season, flooding, and even droughts have had negative effects on the sales and rentals of travel trailers), Let's Go's management
believes these problems will be mitigated in the future by global warming. All sales projections are done by Mark Newman in his role as Let's Go's president.
To keep from losing sales, the company maintains finished goods inventory on hand at the end of each month equal to 300 trailers plus 20% of the next month's sales. The finished goods inventory on December 31, 2010, was
budgeted to be 1,000 trailers.
TRAILER PRODUCTION
Sheet aluminum represents the company's single most expensive raw material. Each travel trailer requires 30 square yards of sheet aluminum. The wholesale cost of sheet aluminum 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 and January, when demand is lowest.
The use of aluminum in vehicles, including travel trailers, is increasing rapidly due to a heightened need for fuel efficient, environmentally friendly vehicles. Aluminum can provide a weight savings of up to 55% compared to an
equivalent steel structure, improving gas mileage significantly. The aluminum industry and suppliers are dispersed across four-fifths of the country, yet they are largely concentrated in four regions: the Pacific Northwest, industrial Midwest, northeastern seaboard, and mid-South. Although this is a broad geographic presence, Let's Go Aero will be affected by distribution costs.
In keeping with the policy set by the production manager, the amount of sheet aluminum on hand at the end of each month must be equal to one-half of the following month's production needs for sheet aluminum. The raw
materials inventory on December 31, 2010, was budgeted to be 39,000 square yards. The company does not keep track of work-in-process inventories.
Budgeted expenses for other materials, as well as wages, heat, light and power, equipment rental, equipment purchases, depreciation, and selling and administrative for the first six months of 2011 are given below.
January
February
March
April
May
June
Other materials
54,000
264,000
222,000
138,000
84,000
90,000
Wages
624,000
1,008,000
1,104,000
672,000
432,000
240,000
Heat, light, & power
130,000
195,000
220,000
135,000
110,000
110,000
Equipment rental
390,000
390,000
390,000
340,000
340,000
340,000
Equipment purchases
300,000
300,000
300,000
300,000
300,000
300,000
Depreciation
250,000
250,000
250,000
275,000
275,000
275,000
Selling & admin
400,000
400,000
400,000
400,000
400,000
400,000
Accounts for aluminum and other materials are paid in full during the month following their purchase. Accounts payable for aluminum and other materials purchased during December 2010 totaled $850,000 combined. This
amount will be paid in January, 2011.
BUDGET PREPARATION
To minimize company time lost on clerical work, Let's Go's accounting department prepares and distributes all budgets to the various departments every six months. Per Mark Newman, "Freeing departmental managers from the budgeting process allows them to concentrate on more pressing matters." In keeping with the recently announced bonus plan for the vice president of purchasing and materials handling, Newman has instructed the accounting
department to budget aluminum at $8 per square yard. The accounting manager recently received a 20% bonus for having prepared the budgets on time with little or no help from the other functional areas.
CASH
Since Let's Go has requested a loan from the bank at a yet to be determine interest rate, the loan officer at the bank has asked the company to prepare a cash budget for the six months ending June 30, 2011, to support the
requested loan amount. The cash balance on January 1, 2011, is budgeted at $100,000 (the minimum cash balance required by Let's Go's board of directors).
HUMAN RESOURCES
To accomplish the company's corporate strategic goals, Let's Go Aero Travel Trailers encourages upward communication among all 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 marketplace and to look at the business of travel trailers as a whole rather than as
functional department successes and decisions. In fact, Newman is so committed to the idea of cooperative management and teamwork that he has hired three separate human resource consultants in the past six months to lead the company's managers through team-building exercises.
The following questions have an accompanying Excel file. You are strongly encouraged to use the Excel file and utilize Excel functions for budgets.
Question 1a: Prepare a sales budget for Let's Go for the first six months of 2011.
Sales budget for Jan - Jun 2011
Jan
Feb
March
April
May
June
Six Months
Budgeted sales volume
Average sales price
$1,100
Budgeted trailer revenue
Question 1b: According to the textbook, the following factors should be considered in sales forecasting:
Current sales levels and sales trends of the past few years.
General economic and industry conditions.
Competitors' actions and operating plans.
Pricing policies.
Credit policies.
Advertising and promotional activities.
The level of unfilled back orders.
List at least three questions or concerns you have about the sales budget.
Question 1c: Jim West, Let's Go's vice president of marketing and sales, is eligible for a 20% bonus based on sales. Unfortunately, Jim did not receive a bonus in 2010. Sales were up, but Mark refused to give Jim the bonus, although it was earned, due to the high number of customer complaints. Jim was really steamed when he heard "no bonus." Didn't Mark know those complaints were for poor quality?
Do you think Jim and his sales team would be happy about the sales budget? Explain.
Question 2a: Prepare a production budget for Let's Go for the first six months of 2011.
Production budget for Jan-Jun 2011
Jan
Feb
March
April
May
June
Six Months
Budgeted sales
Add: desired ending inventory
Total needs
Less: beginning inventory
Trailer production
2,600
Question 2b: Tom Sloan is Let's Go's production manager. He set the policy for finished goods inventory on hand at the end of each month equal to 300 trailers plus 20% of the next month's sales. The finished goods inventory on December 31, 2010, was budgeted to be 1,000 trailers. Tom had always been trying to get the sales department to consider adopting flexible inventory levels. But Jim West, Let's Go's vice president of marketing and sales, refused. He wanted no less than 1,500 trailers at the end of each month. Tom was upset at work because he didn't get the annual 20% bonus thanks to the poor quality of trailers. Secretly, Tom started contacting head hunters.
Do you think Tom and his production department would benefit from the production budget? Explain.
Question 3a: Prepare an aluminum purchase budget for Let's Go for the first six months of 2011.
Aluminum purchase budget for Jan-Jun 2011
Jan
Feb
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
$816,000
Question 3b: Vicky Draper is Let's Go's vice president of purchasing and materials handling. She is eager to implement just-in-time as a way of lowering Let's Go's aluminum cost. To offset the expense of distribution, Let's Go is
located in Pennsylvania. Her projected 20% bonus, recently announced by Mark and effective for year-end 2011, is based on her ability to lower total material cost. Initially enthusiastic about the job and ability to earn a significant bonus, she has become discouraged and angry. She is unable to convince Let's Go's current aluminum supplier to sign a prime vendor contract. Her efforts to locate an alternative vendor who is willing to accept the conditions of a just in-time contract have similarly failed. She blames Tom Sloan, Let's Go's production manager. Let's Go's current aluminum vendor refuses to sign a just-in-time prime vendor contract due to Tom's uneven production schedule and his refusal to pay on time. Tom has been seen reading the help wanted ads, and Vicky overheard him talking to an employment agency.
If you were Vicky, what are your opinions about the aluminum purchase budget? Explain.
Question 4a: Prepare a cash budget for Let's Go for the first six months of 2011.
Cash budget Jan-Jun 2011
Jan
Feb
March
April
May
June
Six Months
Cash beginning balance
Add: cash collections
Total cash available
$1,801,500
Less: cash disbursements
headings only
headings only
headings only
headings only
headings only
headings only
headings only
Aluminum
$850,000
Other materials
Wages
Heat, light & power
Equipment rental
Equipment purchases
Depreciation
selling & admin
Total cash disbursements
$2,694,000
Excess (deficiency)
Financing
headings only
headings only
headings only
headings only
headings only
headings only
headings only
Borrowings
Repayments
Interest (To be determined)
TBD
TBD
TBD
TBD
TBD
TBD
TBD
Total financing
To be invested
$60,100
Cash balance ending
Question 4b: Becky Newman is Let's Go's vice president of finance. He has requested an $800,000, 90 day loan from the bank at a yet to be determine interest rate. If you were the bank reviewing the cash budget by Becky, what
concerns would you have about the loan?
Question 5: What other questions/concerns you have about budgets and the budgeting process?
Expert Answer:
To prepare the sales budget for Lets Go Aero for the first six months of 2011 we need to project the number of trailers to be sold each month and calculate the revenue based on the average sales price ... View the full answer
