IMA Case Study - Let’s Go Aero Travel Trailers

Sally Wright

University of Massachusetts-Boston

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 47—65)

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.

MARKETING AND SALES

The forecasted increase in Let’s Go’s sales can be seen in the

company’s sales projections presented in Exhibit 1 (actual for

the years 2005 through 2010 and projected for the years 2011

through 2015). 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.

IMA EDUCATIONAL CASE JOURNAL 1 VOL. 4, NO. 1, ART. 3, MARCH 2011

ISSN 1940-204X

Let’s Go Aero Travel Trailers: Incorporating the New Model

of the Organization into the Teaching of Budgeting

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. Jim West, Let’s Go’s vice president of marketing and

sales, would rather see a minimum finished goods inventory

of no less than 1,500 trailers. Jim refuses to talk to Tom Sloan,

Let’s Go’s production manager. Tom is always trying to get

Jim to consider adopting flexible inventory levels, which Jim

is certain would affect his yearly bonus. The vice president of

sales and marketing 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? All of Jim’s efforts

to grow sales and attract customers were, once again, destroyed

by Tom Sloan and his production failures.

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.

Vicky Draper, Let’s Go’s vice president of purchasing

and materials handling, 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.

Vicky’s 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 her job

and ability to earn a significant bonus, Vicky has become

discouraged and angry. She is unable to convince Let’s

Go’s current aluminum supplier to sign a prime vendor

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’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 over heard him talking to an

employment agency.

In keeping with the policy set by Tom as Let’s Go’s

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 Aluminum and 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

Aluminum $816,000 $1,056,000 $888,000

Other materials 54,000 264,000 222,000

Wages 624,000 1,008,000 1,104,000

Heat, light, & power 130,000 195,000 220,000

Equipment rental 390,000 390,000 390,000

Equipment purchases 300,000 300,000 300,000

Depreciation 250,000 250,000 250,000

Selling & admin 400,000 400,000 400,000

April May June

Aluminum $552,000 $336,000 $240,000

Other materials 138,000 84,000 90,000

Wages 672,000 432,000 240,000

Heat, light, & power 135,000 110,000 110,000

Equipment rental 340,000 340,000 340,000

Equipment purchases 300,000 300,000 300,000

Depreciation 275,000 275,000 275,000

Selling & admin 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.

IMA EDUCATIONAL CASE JOURNAL 2 VOL. 4, NO. 1, ART. 3, MARCH 2011

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’s Go 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%.

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 foot. 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

Let’s Go’s vice president of finance, Becky Newman, has

requested an $800,000, 90 day loan from the bank at a yet to

be determine interest rate. Since Let’s Go has experienced

difficulty in paying off its loans in the past, 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.

REQUIRED

1. Discuss the validity and reasonableness of Let’s Go’s sale

projections.

2. Prepare production, purchasing, and cash budgets for Let’s

Go for the first six months of 2011 using the formats below.

(hint: spreadsheet programs are wonderful!):

IMA EDUCATIONAL CASE JOURNAL 3 VOL. 4, NO. 1, ART. 3, MARCH 2011

PRODUCTION BUDGET

Jan Feb March April May June Six Months

Budgeted Sales

Add: desired ending inventory

Total needs ------- ------- ------- ------- ------- ------- -------

Less: beginning inventory ------- ------- ------- ------- ------- ------- -------

Trailer production

Discuss the advantages and disadvantages of the budgets

you have prepared. Who in the company does the budget

help and whom, potentially, does it hurt. Does the budget

help or hurt the sales department? What about production

and finance? How are the various functional areas affected

and why?

3. Andy Baxter, newly hired by Let’s Go Aero from a

competitor, suggests preparing the production budget

assuming stable production. Prepare a second and third

set of production, purchasing, and cash budgets. Hold

production to a constant 3,000 trailers per month for the

second set of budgets, and 3,500 trailers per month for the

third set of budgets. The format for the purchasing and

cash budgets should remain as presented in question 2.

Use the following approach for the production budget:

Discuss the advantages and disadvantages of the second

and third sets of production, purchasing, and cash budgets

you have prepared. Who within the company do these

budgets help and whom, potentially do they hurt? Do these

budgets help or hurt the sales department? What about

production and finance? How are the various functional

areas affected, and why?

IMA EDUCATIONAL CASE JOURNAL 4 VOL. 4, NO. 1, ART. 3, MARCH 2011

PURCHASES BUDGET

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 $ $ $ $ $ $ $

CASH BUDGET

Jan Feb March April May June Six Months

Cash beginning balance $____ $____ $____ $____ $____ $____ $____

Add: cash collections

Total cash available

Less: cash disbursements

xxxxx

xxxxx

xxxxx

Etc.

Total cash disbursements ------ ------ ------ ------ ------ ------ ------

Excess (deficiency) ____ ____ ____ ____ ____ ____ ____

Financing

Borrowings

Repayments

Interest ____ ____ ____ ____ ____ ____ ____

Total financing

Cash balance ending $ $ $ $ $ $ $

IMA EDUCATIONAL CASE JOURNAL 5 VOL. 4, NO. 1, ART. 3, MARCH 2011

4. 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 detail sales for 2010 (actual) and 2011 (projected) by

month are as follows:

2010 2011

Actual Projected

January 1,983 2,500

February 3,218 4,000

March 3,981 5,000

April 3,240 3,000

May 1,755 2,000

June 901 1,000

July 763 1,000

August 611 1,000

September 1,622 2,000

October 1,678 2,000

November 1,439 2,000

December 2,131 2,500

Total number of trailers 23,322 28,000

Actual sales in dollars for the last two months of 2010 and

budgeted sales for the first six months of 2011 follow:

November 2010 (actual) $1,439,000

December 2010 (actual) $2,131,000

January 2011 (budgeted) $2,500,000

February 2011 (budgeted) $4,000,000

March 2011 (budgeted) $5,000,000

April 2011 (budgeted) $3,000,000

May 2011 (budgeted) $2,200,000

June 2011 (budgeted) $1,100,000

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.

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EXHIBIT 1.

ACTUAL AND PROJECTED SALES IN NUMBER OF TRAILERS

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

PRODUCTION BUDGET

Jan Feb March April May June Six Months

Production (trailers) 3,000 3,000 3,000 3,000 3,000 3,000 18,000

Add: beginning inventory ____ ____ ____ ____ ____ ____ ____

Total available

Less: budgeted sales ____ ____ ____ ____ ____ ____ ____

Ending inventory