Lets Go Aero Trailers 5o25n

Q1) Discuss the validity and reasonableness of Let’s Go’s sale projections. The sales projections made by Mark Newman are not reasonable for the following reasons. Ye Budgeted ar Sales 20 05 13,765 20 06 14,880 20 07 15,991 20 08 17,809 20 09 19,634 20 10 23,322 20 11 28,000 20 12 33,600 20 13 40,320 20 14 48,384 20 15 58,060 





 

% Increa se

8.10 7.47 11.37 10.25 18.78 20.06 20.00 20.00 20.00 20.00

A consistent and stable growth rate of 20% is very optimistic and unrealistic. Granted, by 2010, the sales had increased up to around 19%. However, the rate of growth cannot be sustained as the growth of the retiree market does not necessarily translate to an equivalent growth in sales for Let’s go. Coachman RV is currently the leader in the trailer market and Let’s Go does not seem to have considered the growth of competition in their forecast. If the market grows at the expected rate, it will also result in an increase in number of competitors. Let’s Go has not presented an alternative strategy to combat market competition and this makes their sales forecasts flawed. There seems to be no co-ordination among the various departments at Let’s Go. The production department disagrees with marketing & sales over the quality of the product. If the high number of customer complaints are due to the poor quality of product, this is going to seriously impact the sales projections. Mark Newman, the president, has not consulted his departments over the problem and this further makes the projections less reliable. The reasoning given by Let’s Go’s management that the weather problems will be mitigated in the future by global warming is fundamentally flawed. Global Warming is going to contribute to increased and erratic weather problems, not mitigate them. If the baby boomers are expected to inherit $14-$20 trillion dollars, they are more likely to switch to high end market of trailers and not buy low-cost trailers.

Q2) Prepare production, purchasing, and cash budgets for Let’s Go for the first six months of 2011 using the formats below.

Production Budget Budgeted Sales ( + Desired Ending ) Inventory Total Needs () Beginning Inventory Trailer Production Purchases Budget Trailer Production Sheet Metal needs per trailer Total Production Needs Desired Ending Inventory Total Material Needs Beginning Inventory Total Sheet Metal purchases Cost per square yard Total Cost

Cash Budget Cash beginning balance ( + )

()

cash collections Total cash available

Janua ry

Febru ary

2,500

4,000

1,100 3,60 0

1,300

1,000

Marc h

Apri Jun l May e Total 3,0 2,0 1,0 5,000 00 00 00

5,300

900 5,90 0

700 3,7 00

500 2,5 00

500 1,5 00

1,100

1,300

900 2,8 00

700 1,8 00

500 1,0 00

2,600 4,200 Januar Februa y ry

4,600 Marc h April

May

500 18,000 1,000 17,000

June

2,600

4,200

4,600

2,800

1,800

1,000

30 78,00 0 63,00 0 141,0 00 39,00 0 102,0 00 8 816,0 00

30 126,0 00

30 138, 000 42,00 0 180, 000 69,00 0 111, 000 8 888, 000

30 84,0 00 27,00 0 111, 000 42,00 0 69,0 00 8 552, 000

30 54,00 0 15,00 0 69,00 0 27,00 0 42,00 0 8 336,0 00

30 30,00 0 15,00 0 45,00 0 15,00 0 30,00 0 8 240,0 00

69,000 195,0 00 63,000 132,0 00 8 1,056, 000

17,500

Total 17,00 0 30 510,0 00 15,000 525,0 00 39,000 486,0 00 8 3,888, 000

Januar Februa y ry March April May June Total 100,00 100,00 100,00 100,00 100,00 160,10 0 0 0 0 0 0 100,000 1,701, 500 1,801, 500

2,528, 600 2,628, 600

3,150,0 00 3,250, 000

3,650,0 00 3,750, 000

3,850, 000 3,950, 000

2,295, 000 2,455, 100

17,175, 100 17,275, 100

850,00 0

816,00 0

552,00 0 138,00 0 432,00 0 110,00 0 340,00 0 300,00

4,498,0 00

624,00 0 130,00 0 390,00 0 300,00

888,00 0 222,00 0 672,00 0 135,00 0 340,00 0 300,00

336,00 0

54,000 1,008, 000 195,00 0 390,00 0 300,00

1,056,0 00 264,00 0 1,104,0 00 220,00 0 390,00 0 300,00

84,000 240,00 0 110,00 0 340,00 0 300,00

762,000 4,080,0 00

cash disbursements Aluminum other materials Wages Heat Light and Power Equipment rental Equipment

900,000 2,190,0 00 1,800,0

purchases Selling and Total cash disbursements Excess (deficiency) Borrowings Repayments Interest Total financing Cash balance ending

0 400,00 0 2,694, 000 (892,5 00) 992,50 0

0 400,00 0 3,163, 000 (534,4 00) 634,40 0

0 400,00 0 3,734, 000 (484,00 0) 584,00 0

992,50 0 100,00 0

634,40 0 100,00 0

584,00 0 100,00 0

0 400,00 0 2,957, 000 793,00 0

0 400,00 0 2,272, 000 1,678, 000

693,00 0 (693,00 0) 100,00 0

1,517, 900 160,10 0

0 400,00 0 1,810, 000 645,10 0

00 2,400,0 00 16,630, 000 645,100

-

800,000

-

800,000 -

645,10 0

645,100

The advantages of this strategy are: 

The inventory requirement for finished goods will be at its optimum level. This ensures that inventory carrying costs are their minimum.



It also gives a structure to the cash cycle of the company, by establishing estimated time and amount of inflow and outflow of money, for production runs or for purchases, and allows the company to plan its activities based on the budgets.



It helps identify potential problem areas for the company (such as capacity shortage, cash shortage, raw material shortage) and gives it time to rectify those issues.



Perhaps the most important advantage of this approach is that it helps to prevent a stock-out situation at the company. The budgeted sales figures provide an estimate of the market demand of the product, and the expected inventory is a standard set by the department to adjust for the variability in this demand. Thus, the company can mitigate this risk and have stock available in case the demand is higher than expected.

The disadvantages of this strategy are: 

These budgets are estimates, and estimates may sometimes be very misleading and make the entire planning process counter-productive.



The labour force needs to be constantly readjusted to match the varying production demands. There is also a threat of variation in efficiency and quality of product due to constant turnover of workforce.



This makes inventory management difficult, as it becomes difficult to manage dispatch and warehousing schedules if the inventory quantity keeps varying.



The cash requirements can be predicted but they are variable, meaning there will be a higher requirement for cash in one month as compared to others. Managing this fluctuating need for cash becomes difficult for the finance department.

Therefore, this budget will help the sales department because there will be no stockouts. It will hurt production department because they always have to catch up to the changing schedule. The finance department will have mixed results. The cash cycle is shortened due to a lower inventory which in-turn reduces the working capital requirements. However, the finance department has to manage variable cash requirements for the variable production schedule, therefore cash management becomes challenging. Q3) Prepare a second and third set of production, purchasing, and cash budgets.

3000 UNITS Production Budget Production (Trailers) ( + Beginning ) Inventory Total Available () Budgeted Sales Ending Inventory

Janu Febru Mar Jun Tota ary ary ch April May e l 3,00 3,00 3,0 3,0 3,0 3,0 18, 0 0 00 00 00 00 000 1,00 0 4,00 0 2,50 0 1,50 0

Purchases Budget Trailer Production Sheet Metal needs per trailer Total Production Needs ( + Desired Ending ) Inventory Total Material Needs () Beginning Inventory Total Sheet Metal purchases Cost per square yard Total Cost

Cash Budget Cash beginning

1,500 4,50 0 4,000 500

500 3,5 00 5,00 0 (1,5 00)

(1,5 00) 1,5 00 3,00 0 (1,5 00)

Marc h

(1,5 00) 1,5 00 2,00 0 (50 0)

(50 0) 2,5 00 1,0 00 1,5 00

1,00 0 19, 000 17,5 00 1,5 00

Janua ry

Febru ary

3,000

3,000

3,000

3,000

3,000

30 90,0 00

30 90,00 0

30 90,0 00

30 90,0 00

30 90,0 00

30 90,0 00

45,00 0 135, 000 39,00 0 96,0 00 8 768, 000

45,00 0 135,0 00 45,00 0 90,00 0 8 720,0 00

45,00 0 135, 000 45,00 0 90,0 00 8 720, 000

45,00 0 135, 000 45,00 0 90,0 00 8 720, 000

45,00 0 135, 000 45,00 0 90,0 00 8 720, 000

45,00 0 135, 000 45,00 0 90,0 00 8 720, 000

April

May

June

Total 18,00 3,000 0 30 540,0 00

45,000 585,0 00 39,000 546,0 00 8 4,368, 000

Februa January ry March April May June Total 100,000 100,00 100,00 100,00 100,00 867,15 100,000

balance ( + )

()

cash collections Total cash available

0

0

0

0

9

1,701,5 00 1,801,5 00

2,528, 600 2,628, 600

3,150, 000 3,250, 000

3,650, 000 3,750, 000

3,850, 000 3,950, 000

2,295, 000 3,162, 159

17,175, 100 17,275, 100

850,000

768,00 0

720,00 0 180,00 0 720,00 0 158,82 4 390,00 0 300,00 0 400,00 0 2,868, 824 381,17 6

720,00 0 180,00 0 720,00 0 158,82 4 340,00 0 300,00 0 400,00 0 2,818, 824 931,17 7

720,00 0 180,00 0 720,00 0 158,82 4 340,00 0 300,00 0 400,00 0 2,818, 824 1,131, 176

720,00 0 180,00 0 720,00 0 158,82 4 340,00 0 300,00 0 400,00 0 2,818, 824 343,33 5

4,498,0 00

(281,1 76) (281,1 76) 100,0 00

(831,1 77) (831,1 77) 100,0 00

(264,0 18) (264,0 18) 867,1 59

cash disbursements Aluminum Other Materials Wages Heat Light and Power

720,000

Equipment rental Equipment purchases

390,000

Selling and Total cash disbursements

400,000 2,818,8 24 (1,017,3 24) 1,117,3 24

50,824 720,00 0 158,82 4 390,00 0 300,00 0 400,00 0 2,787, 647 (159,0 47) 259,04 7

1,117,3 24 100,00 0

259,04 7 100,0 00

Excess (deficiency) Borrowings Repayments Interest Total financing Cash balance ending

158,824

300,000

343,3 35

770,824 4,320,0 00 952,941 2,190,0 00 1,800,0 00 2,400,0 00 16,931, 765 343,335 1,376,3 71 (1,376,3 71) 343,33 5

Notes:   

The cash disbursements for aluminium are based on the revised purchase budget prepared. Other materials are considered as a percentage of aluminium cost and are assumed to increase in the same proportion. Wages and Heat, Light & Power have been assumed to increase in the proportion of units produced and have been spread equally over the 6 months. Equipment rental, equipment purchases and selling and expenses have been assumed to be unchanged (fixed expenses)

3500 UNITS Production Budget Production (Trailers) ( Beginning + Inventory

Janu Febru ary ary 3,50 0 3,500 1,00 2,000 0

Mar Apr Ma Jun Tota ch il y e l 3,5 3,5 3,5 3,5 21,0 00 00 00 00 00 1,5 500 2,0 1,00 00 00 0

) Total Available () Budgeted Sales Ending Inventory

4,50 0 2,50 0 2,00 0

Purchases Budget Trailer Production Sheet Metal needs per trailer Total Production Needs ( + Desired Ending ) Inventory Total Material Needs () Beginning Inventory Total Sheet Metal purchases Cost per square yard Total Cost

Cash Budget Cash beginning

5,50 0 4,000

5,0 00 5,0 00

3,5 00 3,0 00

4,0 00 2,0 00 2,0 00

1,500

-

500

Janua ry

Febru ary

Marc h

3,500

3,500

3,500

3,500

3,500

30 105, 000

30 105,0 00

30 105, 000

30 105, 000

30 105, 000

30 105, 000

52,50 0 157, 500 39,00 0 118, 500 8 948, 000

52,50 0 157,5 00 52,50 0 105,0 00 8 840,0 00

52,50 0 157, 500 52,50 0 105, 000 8 840, 000

52,50 0 157, 500 52,50 0 105, 000 8 840, 000

52,50 0 157, 500 52,50 0 105, 000 8 840, 000

52,50 0 157, 500 52,50 0 105, 000 8 840, 000

April

5,5 00 1,0 00 4,5 00

22, 000 17,5 00 4,50 0

May

June

Total 21,00 3,500 0 30 630,0 00

52,500 682,5 00 39,000 643,5 00 8 5,148, 000

Februa January ry March April May June Total 100,000 100,00 100,00 100,00 100,00 100,00 100,000

balance ( + )

cash collections Total cash available

()

0

0

0

0

0

1,701,5 00 1,801,5 00

2,528, 600 2,628, 600

3,150, 000 3,250, 000

3,650, 000 3,750, 000

3,850, 000 3,950, 000

2,295, 000 2,395, 000

17,175, 100 17,275, 100

850,000

948,00 0

840,00 0 210,00 0 840,00 0 185,29 4 390,00 0 300,00 0 400,00 0 3,165, 294

840,00 0 210,00 0 840,00 0 185,29 4 340,00 0 300,00 0 400,00 0 3,115, 294 634,70 6

840,00 0 210,00 0 840,00 0 185,29 4 340,00 0 300,00 0 400,00 0 3,115, 294 834,70 6

5,158,0 00

(534,7 06) (534,7 06) 100,00 0

(734,7 06) (734,7 06) 100,00 0

840,00 0 210,00 0 840,00 0 185,29 4 340,00 0 300,00 0 400,00 0 3,115, 294 (720,2 94) 820,29 4

cash disbursements Aluminum Other Materials Wages Heat Light and Power

840,000

Equipment rental Equipment purchases

390,000

Selling and Total cash disbursements

400,000 2,965,2 94 (1,163,7 94) 1,263,7 94

Excess (deficiency) Borrowings Repayments Interest Total financing Cash balance ending

185,294

300,000

1,263,7 94 100,000

62,735 840,00 0 185,29 4 390,00 0 300,00 0 400,00 0 3,126, 029 (497,4 30) 597,43 0 597,43 0 100,00 0

84,706 15,294 15,294 100,00 0

820,29 4 100,00 0

902,735 5,040,0 00 1,111,7 65 2,190,0 00 1,800,0 00 2,400,0 00 18,602, 500 (1,327,4 00) 2,696,8 12 (1,269,4 12) 1,427,4 00 100,000

Notes:   

The cash disbursements for aluminium are based on the revised purchase budget prepared. Other materials are considered as a percentage of aluminium cost and are assumed to increase in the same proportion. Wages and Heat, Light & Power have been assumed to increase in the proportion of units produced and have been spread equally over the 6 months. Equipment rental, equipment purchases and selling and expenses have been assumed to be unchanged (fixed expenses)

Advantages of this strategy The advantages of this strategy are as follows :  

The constant levels of production per month make it easier for the production department as the work force required is constant. It also ensures that there is no variation in efficiency levels and quality of product as there is no turnover of labour. It makes inventory management easier as the scheduled production will be constant, and thus the inventory manager will not have to adjust his schedules for the variability of production.



It makes cash management easier as the requirements for cash will be constant because of a fixed production level.

The disadvantages of this strategy are: 

At 3000 units per month, there are stock outs in the month of March, April and May. This results in delay of delivery of goods for the customer and damage to the reputation of the company. This is a serious concern for the company as they are already receiving complaints from the customers about the quality of their product. Delay in delivery of goods will only make the matters worse. Conversely, at 3500 units per month, there are 4500 units in stock by the end of June. This means that the company will have to bear high carrying costs for each month that the units remain unsold.



Both production levels put an additional financial burden on the company in one way or another. At 3500 units, the cost of producing excess units coupled with high carrying costs will drive up the company’s overheads. At 3000 units, the inventory stock-outs will represent an opportunity cost in the form of lost sales.

Therefore, the constant production budget will help the production department. It will hurt the sales department due to potential stockouts. The finance department will also be affected adversely due to the increase in working capital requirements. On the flip side, having a fixed cash requirement will make their job slightly easier.

Q4) What metric should Let’s Go use to measure the performance of each manager in this case? What bonus system would you suggest that incorporates these measures and also encourages the managers to work as a team? The current system of awarding bonuses is creating a rift between managers as their performance are judged in isolation. A metric that may be favourable for the purchasing manager may not be favourable for the production manager. For example, the purchase manager is awarded a bonus based on her ability to lower the material cost. Though the justin-time inventory system is good for the company and for the purchasing manager, she cannot implement it because the production department and sales department are not in favor of the system. The sales department would want high finished goods inventory to eliminate the possibility of lost sales. While the fixed production strategy would help solve the problems of labor supply and material cost, it would lead to over/under production discussed earlier. To tackle this problem, the budgets should be made in co-ordination of all the departments and not just with the input of one department. All departments need to be involved and the management needs to make sure that the strategies of departments don’t contradict each other. This will result in increased accuracy of budgets and realistic yardsticks for performance appraisals. It will also help the company to prepare a unified marketing strategy, cost strategy, and production strategy thereby eliminating inter-departmental disputes. The appraisal and reward system should be devised in a manner that promotes the cooperation and coordination among the different functional units. The company should have an evaluation system based on individual department goals and company goals. An appropriate method would be to give a higher weightage to company goals (E.g: 70-30). Furthermore, the goals should be set by the top management with a long-term view in mind. Besides including short-term metrics such as sales numbers, material cost efficiency, profitability etc., it should also set goals such as quality improvement, collaborative synergies, innovation, process improvements, Customer satisfaction, market share etc. This system would help Let’s Go create a long-term vision for the employees and will align the motives of the employees with the unified objectives of the company.