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AirTractors Inc. AirTractors Incorporated design, manufacture and build custom hauling vehicles. The company was founded in Waycross Georgia in the early 1960's as a parts subcontractor to the farm implement industry. Early in their business history AirTractor Inc. had parts contracts with John Deere, Minneapolis Moline, Fordson and International Harvester in addition to local specialized farm implement manufactures and dealers. AirTractor was solely dependent on the farm economy during its early stages of the company's development. When the agricultural business boomed, the company did well. However, when the other side of the cycle hit, the company suffered. Looking for a way to stabilize the dependent and cyclical nature of the company, the owner Darryl Owen decided to seek some non-agricultural dependent contracts. Darryl was visiting his brother-in-law Phil who lived in Atlanta in the early spring of 1965 when the idea of specialized luggage tractors was suggested to him. Phil was a pilot for Delta Airlines at the time and was complaining how inefficient the baggage handling had become at the new Hartsfield Airport in Atlanta. The baggage carts were pulled by hand out to the planes and back, and the ground crew in charge of the baggage sometimes had to pull baggage carts that were in excess 1 of a ton. This was a tough enough job when the weather was good; however it caused real delays when there was rain or the occasional snow squall hit the Atlanta region. Darryl suggested to his brother-inlaw that they should design a special vehicle to tow the baggage carts to their destinations, thus AirTractors was born. The first prototype came off the assembly line in the spring of 1966 and was tested at Hartsfield in Atlanta. Darryl ran the plant and Phil kept his job as a pilot. However, Phil would also \"drop-in\" on airport managers as he flew around the country, extolling the virtues of their new product. With in two years, Phil became the head of sales for AirTractors Inc. as they built first a nation wide, and then a world-wide following. Today, the luggage tractors are built in a specific sequence, starting with a solid frame. It is very important to have precise fit in the frame and the engine mounts due to the extreme weights and pressures that the tractors must endure. There are tests at every step of the process and if the components do not pass them, the tractors must be disassembled and rebuilt. Depending where in the production process the failure takes place in, this could cost the company anywhere from $500 to $15,000. During the last inspection the tractor is tested on a dynometer to ensure that the tractor can endure both the stress and 2 torque required to perform up to standards. Finally the tractor is cleaned, cradled and crated for shipping. Presently the AirTractors Inc. is a publicly traded corporation, which has a work force of 213 full-time employees in the plant. The head office has 17 full-time staff. Its products include the six models of airport towing tractors, a line of luggage carts (they attach behind the tractors for hauling) and a line high torque aircraft movers (larger towing tractors), used for repositioning aircraft around the airports or at their gates. The high torque aircraft movers will fit any commercial airplane manufactured. There are also adapter forks, which will fit almost any foreign aircraft manufactured airplane, so that the products can be used overseas. The business has grown substantially since its beginnings. The company now encompasses three distinct divisions broken down on their product lines. The projected sales for each of the product lines for the upcoming year are as follows: towing tractors - $14,425,000, luggage carts - $3,800,000, and aircraft movers - $3,200,000. In April 2006 there was a serious discussion at the board meeting that the plant needed a new lathe for wheel spindle components. The existing lathe had been used in spindle production for 12 years and the 3 tooling tolerances were getting harder to maintain. Jerry Jones, the company comptroller, suggested that a new machine be purchased as soon as possible. Jerry had been in Atlanta, Georgia the previous week and had inquired into the cost of a new machine at Southern Tools Incorporated. The new machine had a purchase price of $700,000. The seller required a $25,000 down payment. At the end of its useful life the machine would have a cash value of $50,000. This is $30,000 more than its book value at that time. If AirTractors Inc. does not want to purchase the lathe; Hydraulics Incorporated will lease the machine to AirTractors for $140,000 per year for 6 years. Jerry returned from Atlanta and went straight to the company's local bank. Rachael Willson, the local bank manager who handled the AirTractor account, informed Jerry that the bank's policies stated that she could approve a six year loan for the new lathe. The rate on the new loan would be 8%. Jerry inquired as to the high rate on the loan. Janet assured him that this was going rate for commercial loans, and with AirTractors Inc. 30% tax rate the loan rate was not as high as it sounded. Cash Projection Problems 4 Phil Kolbe, the company's credit manager for the towing tractor division, had noticed a disturbing trend in the payment pattern of AirTractors Inc.'s customers. Five years ago the customers had a payment pattern of 40% paying cash, 45% paying in the first month after the purchase and 15% paying in the second month after the purchase. The pattern of payment has changed he noted in a recent discussion with Walter Wood. He had told Walter that the current payment pattern was 30% paying cash, 40% paying in the first month after the purchase and the remainder paying in the second month after the purchase. The firm is considering giving a 2/10 net 30 discount to speed up collections. The projected and actual monthly sales for the towing tractor in the upcoming budget period are: Actual Sales This Year: Month Sales November 480,000 December 540,000 Projected Sales: Next year January $1,750,000 February 1,200,000 5 March 2,200,000 April 1,700,000 May 1,500,000 June 1,250,000 July 850,000 August 1,350,000 September 1,300,000 October 1,475,000 November 1,375,000 December 1,575,000 Total 17,252,000 The expenses for the period take the following pattern. The engines are ordered and paid for two month prior to the month in which the sale occurs. The engines costs are 10% of the projected sales for that month. Wheels and tires, which are also outsourced, are ordered and paid for one month prior to the month in which the sale occurs. The costs of the wheels are 5% of the projected sales for that month. The company has variable costs of production of 20% which occur and are expensed in the month of the sale. The company has a fixed cost of $150,000 per month, pays salaries of $420,000 per month and has wages equal to 20% of that month's 6 sales. The company has a $275,000 tax payment due on a quarterly basis (due March, June, September and December). Also, the company incurs miscellaneous expenses of 10% of the sale in the month of the sale. Inventory The variability in sales has consequently led to problems in inventory. Stan Brown has studied the sales and has concluded that the use of EOQ to order inventory could be employed on a limited basis, for example, small components. As an example, Stan noted that AirTractor Inc. used 28,000 wheels of the same size during the previous year. The wheels were ordered from Standard Pneumatic (SP) in Jacksonville, Fl. about 320 miles away. SP can get an order to AirTractor Inc. in 6 days, and in half that time if it is a rush order. (Note: all orders rush, or not, must be given in multiples of 25). The tires cost $22.00 each. Inventory holding costs are estimated to be 10% and the order costs are $75.00 per order. According to Stan most other inventory items are not conducive to EOQ. As an example, Stan used tractor engines. Below are the months and the number of engines that will be used to meet the firms projected sales. There is a two months delay between the order and 7 the final sale. In other words, the engines ordered in November will be in tractors sold in January. Months Engines Used November 180 December 650 January 1,950 February 3,110 March 3,900 April 2,490 May 2,205 June 908 July 375 August 375 September October Total 220 190 16,553 The engines are ordered from OMC in Michigan. OMC can get an order ready for AirTractor Inc. in 3 weeks, 2 weeks if it is a rush order. The engines cost $435.00 each. The inventory holding costs are approximately 12% and the order costs are $2000 per order. The reason that the order costs are so high is because AirTractor Inc. is 8 responsible for picking-up the order in Michigan. Stan, however, is wondering if he could cut the costs of carrying inventory by ordering engines every 2 months rather than monthly. Cash Mash AirTractor Inc. projects that cash outlays of $6 million dollars will occur uniformly throughout the year next year. The company plans to meet its cash requirements by periodically selling marketable securities from its portfolio. The firm's marketable securities earn 9% and the cost per transaction of converting securities to cash is $42.00. The standard deviation (2) of the cash is $75,000 and the company has to maintain a minimum cash balance of $100,000 in their checking account according to their bank agreements. Questions 1) a) Using the Baumol Model of cash management please calculate the amount of cash that should be transferred? b) Graph the results. 2) a) Using the Miller - Orr model calculate the Z*, the ideal amount (z) and the Upper Limit (h) for the company (in nearest 1000's).The company wants to keep the lower level (r) at $100,000. b) Graph the results. 9 3) Given the sales estimations and the cost estimates, do a complete cash budget for the first 6 months of next year. (Total revenues, total expenses and monthly cash balance from that month's transaction). 4) What is the economic value ordering quantity? 5) How many orders should be placed each year? 6) What is the reorder should point? 7) Calculate the total inventory cost 8) What is the total cost of ordering and carrying inventories, including safety stock. 10