Managerial Accounting - Phillips, Inc. manufactures travel trailers bought primarily

Phillips, Inc. 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. However, in the view of Phillips’s president, Trevor Thompson, the real growth in the future is in the retiree market. Thompson 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 Phillips. As Thompson 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 influence.

According to 2019 research, 80% of boomers (aged 55—73) own their own home, 60% are satisfied with their financial situation, and 48% are married. The spending power of this demographic is likely to increase. In addition, baby boomers make up a significant part of the total U.S. population. According to the U.S. Census Bureau, in 2019 baby boomers represented 21% of the populace. In that year there were just under 72 million boomers living in the United States, with the largest populations living in California, Texas, New York, and Arizona.

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 sTommyulation 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 Phillips’s sales can be seen in the company’s sales projections presented in Exhibit 1 (actual for the years 2015 through 2020 and projected for the years 2021 through 2025) and Exhibits 2 and 3. 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), Phillips’s management has attempted to adjust sales numbers for these events. All sales projections are done by Trevor Thompson in his role as Phillips’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, 2020, was budgeted to be 1,000 trailers. Jeremy Wallace, Phillips’s vice president of marketing and sales, would rather see a minimum finished goods inventory of no less than 1,500 trailers. Jeremy refuses to talk to Tommy Fields, Phillips’s production manager. Tommy is always trying to get Jeremy to consider adopting flexible inventory levels, which Jeremy is certain would affect his yearly bonus. The vice president of sales and marketing is eligible for a 20% bonus based on sales. Unfortunately, Jeremy did not receive a bonus in 2010. Sales were up, but Trevor refused to give Jeremy the bonus, although it was earned, due to the high number of customer complaints. Jeremy was really steamed when he heard “no bonus.” Didn’t Trevor know those complaints were for poor quality? All of Jeremy’s efforts to grow sales and attract customers were, once again destroyed by Tommy Fields 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 Tommye 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, Phillips will be affected by distribution costs.

Fiona Williams, Phillips’s vice president of purchasing and materials handling, is eager to implement just-in-Tommye as a way of lowering Phillips’s aluminum cost. To offset the expense of distribution, Phillips is located in Pennsylvania. Fiona’s projected 20% bonus, recently announced by Trevor and effective for year-end 2021, is based on her ability to lower total material cost. Initially enthusiastic about her job and ability to earn a significant bonus, Fiona has become discouraged and angry. She is unable to convince Phillips’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-Tommye contract, have similarly failed. She blames Tommy Fields. Phillips’s current aluminum vendor refuses to sign a just-in-Tommye prime vendor contract due to Tommy’s uneven production schedule and his refusal to pay on Tommye. Tommy has been seen reading the help wanted ads, and Fiona over heard him talking to an employment agency.

In keeping with the policy set by Tommy as Phillips’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, 2020, 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 2021 are given below.

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 2020 totaled $850,000 combined. This amount will be paid in January 2021.

Competition

All forms of vacation and leisure activities, including theme parks; beach or cabin rentals, health spas, resorts, and cruise vacations compete with Phillips 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, 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 affluent senior market.

Coachman RV, a direct Phillips 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 percent and labor costs by 78 percent.

Budget Preparation

To minimize company Tommye lost on clerical work, Phillips’s accounting department prepares and distributes all budgets to the various departments every six months. Per Trevor Thompson, “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, Thompson 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 Tommye with little or no help from the other functional areas.

Cash

Phillips’s vice president of finance, Bonnie Thompson, has requested an $800,000, 90 day loan from the bank at a yet to be determine interest rate. Since Phillips 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, 2021, to support the requested loan amount. The cash balance on January 1, 2021, is budgeted at $100,000 (the minimum cash balance required by Phillips’s board of directors).

Human Resources

To accomplish the company’s corporate strategic goals, Phillips 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. Thompson, as Phillips’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, Thompson 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.

Past experience show that 25 percent of a month’s sales are collected in the month of sale, 10 percent in the month following the sale, and 60 percent in the second month following the sale. The remainder is uncollectible.

Required

1.            On an Excel worksheet, input the case numerical factsin a data section. Referring to the data using equations, prepare the production budget, materials purchases budget, and cash budget for each the first six months of 2021 ending with June 30, 2021 and a total for the six months. The budgets should be in good form and the names of the group members should be in the file name. Only one file should be submitted by the group.

2.            In a Word document, discuss the validity and reasonableness of Phillips’s sales projections (could add information any changes in the market since 2019). Also, discuss the advantages and disadvantages of the budgets you have prepared. Who in the company does the budget help and who, 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.            Phillips recently hired Don Thompson from a competitor. She suggests preparing the production budget assuming stable production. Prepare a second and third set of production, material purchases, and cash budgets, holding 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.  Discuss the advantages and disadvantages of the second and third set of production material purchase, and cash budgets prepared and whom these budgets help or hurt. Add this discussion to your requirement 2 discussion.

4.            What metric should Phillips use to measure the performance of each manager in this case? What bonus system would you suggest that incorporates these measures and encourages the managers to work as a team? Include this discussion in the Word document, after the requirement 3 discussion. The group should submit only one Word file and it be a minimum of three pages, 12-size font, Tommyes New Roman, one-inch margins, single-spaced paragraphs, and double-spaced between paragraphs. The use of headings is encouraged.