This project is adapted from "Let's Go Aero Travel Trailers: Incorporating the New Model of the Organization into the Teaching of Budgeting" published in IMA Educational Case Journal (Volume 4 Number 1, March 2011). The case 

author is Sally Wright. Requirements are different from the original requirement in the published case. 

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?