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Let’s Go Aero Travel Trailers Case

1. Based on the following analysis, I do not believe Let’s Go Aero’s sales projections are neither
reasonable nor valid. As can be seen from the “Sales in # of Trailers” table below, Let’s Go’s
sales are projected to grow by 20% each year for the next five years (2011 to 2015). However,
over the last six years from 2005 to 2010, Let’s Go Aero’s sales have had an average year on
year growth of 11.10%. There is no information in the case to reflect this dramatic increase in
year to year sales.
SALES IN # OF TRAILERS YTY
Sales
(Actual/Projected*) Growth
2005 13765 -
2006 14880 8.10%
2007 15991 7.47%
2008 17809 11.37%
2009 19634 10.25%
2010 23322 18.78%
2011* 28000 20.06%
2012* 33600 20.00%
2013* 40320 20.00%
2014* 48384 20.00%
2015* 58060 20.00%

Let’s Go Aero’s travel trailers are primarily bought by young families and retirees who are
interested in a light low-cost trailer that can be easily pulled by a mid-sized family car. And
though 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 experience, there is no market
information in the case that indicates this sector of Let’s Go’s target demographic will continue
to expand at this rate, or continue to expand at all. In addition, Let’s Go Aero’s president, Mark
Newman, believes the real growth in the future is in the retiree market; he believes continuing
sales growth for the company will come from the health of the average retiree coupled with the
national trend to return to nature. Not only is there no market data to support this assumption but
there is also no data to support that even with such growth in the market that Let’s Go Aero will
be able to capture such market share.

All forms of vacation and leisure activities are direct competitors of Let’s Go Aero as well as
other travel trailer manufacturers such as Crossroads RV, Jayco, Coachman RV and Scamp. The
case details that Coachman RV has been able to reduce material costs by more than 60% and
labor costs by 78%; these reductions in costs would enable Coachman RV to decrease their sales
price, which could help them to steal market share and sales away from Let’s Go Aero. In
addition, the case also mentions that manufacturers that offer more diverse product lines such as
high-end trailers with luxury accommodations could compete for the fairly affluent senior
market.
Therefore, given the increase in competition as well as the lack of market data to support the
assumptions of market and sales growth made by Newman, it is neither valid nor reasonable for
Let’s Go Aero to project sales growth of 20% per year. Instead, Let’s Go Aero should project
their sales more conservatively, for example, by the 11.10% average growth (see table below)
they have experienced over the last six years, because there are no indications from the case that
the current market will be changing or that the sales efforts made by Let’s Go Aero would help
them to increase their sales significantly.

Projected Sales YTY


Sales
(Number of Trailers) Growth
2010 23322 -
2011* 25933 11.19%
2012* 28835 11.19%
2013* 32063 11.19%
2014* 35652 11.19%
2015* 39642 11.19%

2. Trailer Production Based on Budgeted Sales

PRODUCTION BUDGET Six


January February March April May June Months
Budgeted Sales 2500 4000 5000 3000 2000 1000 17500
Add: desired ending
inventory 1100 1300 900 700 500 500 500
Total needs 3600 5300 5900 3700 2500 1500 18000
Less: beginning inventory 1000 1100 1300 900 700 500 1000
Trailer production 2600 4200 4600 2800 1800 1000 17000

PURCHASES BUDGET
January February March April May June Six Months
Trailer production 2600 4200 4600 2800 1800 1000 17000
Sheet metal needs per trailer 30 30 30 30 30 30 30
Total production needs 78000 126000 138000 84000 54000 30000 510000
Add: desired ending inventory 63000 69000 42000 27000 15000 15000 15000
Total materials needs 141000 195000 180000 111000 69000 45000 495000
Less: beginning inventory 39000 63000 69000 42000 27000 15000 39000
Total sheet metal purchases 102000 132000 111000 69000 42000 30000 486000
Cost per square yard $8.00 $8.00 $8.00 $8.00 $8.00 $8.00 $8.00
Total cost $816,000.00 $1,056,000.00 $888,000.00 $552,000.00 $336,000.00 $240,000.00 $3,888,000.00

CASH BUDGET
January February March April May June Six Months
Cash beginning balance $100,000.00 $100,000.00 $100,000.00 $100,000.00 $100,000.00 $100,000.00 $ 100,000.00
Add: cash collections $1,701,500.00 $2,528,600.00 $3,150,000.00 $3,650,000.00 $3,855,000.00 $2,297,000.00 $17,182,100.00
Total cash available $1,801,500.00 $2,628,600.00 $3,250,000.00 $3,750,000.00 $3,955,000.00 $2,397,000.00 $17,782,100.00
Less: cash disbursements
Aluminum &
other materials $850,000.00 $870,000.00 $1,320,000.00 $1,110,000.00 $690,000.00 $420,000.00 $5,260,000.00
Wages $624,000.00 $1,008,000.00 $1,104,000.00 $672,000.00 $432,000.00 $240,000.00 $4,080,000.00
Heat, light, & power $130,000.00 $195,000.00 $220,000.00 $135,000.00 $110,000.00 $110,000.00 $900,000.00
Equipment rental $390,000.00 $390,000.00 $390,000.00 $340,000.00 $340,000.00 $340,000.00 $2,190,000.00
Equipment purchases $300,000.00 $300,000.00 $300,000.00 $300,000.00 $300,000.00 $300,000.00 $1,800,000.00
Depreciation $250,000.00 $250,000.00 $250,000.00 $275,000.00 $275,000.00 $275,000.00 $1,575,000.00
Selling & admin $400,000.00 $400,000.00 $400,000.00 $400,000.00 $400,000.00 $400,000.00 $2,400,000.00
Total cash disbursements $2,944,000.00 $3,413,000.00 $3,984,000.00 $3,232,000.00 $2,547,000.00 $2,085,000.00 $18,205,000.00
-
Excess (deficiency) $1,142,500.00 -$784,400.00 -$734,000.00 $518,000.00 $1,408,000.00 $312,000.00 -$422,900.00
Financing
Borrowings $1,242,500.00 $884,400.00 $834,000.00 $0.00 $0.00 $0.00 $2,960,900.00
-
Repayments $0.00 $0.00 $0.00 -$418,000.00 $1,308,000.00 -$212,000.00 -$1,938,000.00
Interest -- -- -- -- -- --
-
Total financing $1,242,500.00 $884,400.00 $834,000.00 -$418,000.00 $1,308,000.00 -$212,000.00 $1,022,900.00
Cash balance ending $100,000.00 $100,000.00 $100,000.00 $100,000.00 $100,000.00 $100,000.00 $100,000.00

The biggest advantage of the budgets is the low ending inventory requirement. Production
requires finished goods inventory to equal to 300 trailers plus 20% of the next month’s sales.
With this strategy, there is never a lot of cost held up in excess inventory as the requirement is
based off of projected sales and not some obsolete number. However, this could become a
disadvantage if sales were ever projected too low as the company could run the risk of having a
stock out. However, given my analysis in the previous question, I do not believe under
forecasting is an issue for Let’s Go Aero, and therefore this strategy for determining finished
goods inventory is an advantage. In addition, this conservative strategy for ending finished goods
inventory also helps to cut down production costs. For example, if the minimum finished goods
inventory aligned with the vice president of marketing and sales’ idea requirement of 1500, the
purchase budget would increase drastically, as the company would need to purchase much more
material for the additional trailers. Lastly, the low finished goods inventory requirement would
allow for quick changes to the trailers, given that there be a change within the market or
consumer preferences.

The disadvantages of the budgets are mostly related to the work force and inventory
management. Given the variance in production needs (i.e., 138,000 square yards in March to
30,000 square yards in June), the workforce will need to be allocated accordingly to satisfy the
varying production needs. Since there is no consistency within the work force, this constant
change could result in unmotivated workers and low productivity. Another disadvantage is the
extreme variance in financing. With the minimum ending cash balance requirement of $100,000,
the borrowing/repayments of loans vary drastically with the varying production schedule. The
high total production needs in the first four months of the year require heavy borrowing, while
the decreasing production needs in the last couple of months allow some repayment of that
borrowing. However, the cash requirement is very difficult to maintain with such a variance in
the production schedule, and the heavy borrowing in the beginning of the year could make it
difficult to repay the loans if the interest (which is currently unknown) is higher than anticipated.

The budget ultimately helps the sales department. Sales are budgeted to have grown by an
average of almost 24% year to year (see below) and the vice president of sales and marketing is
eligible for a 20% bonus based on sales. With the way bonuses are allocated in the company, this
is the only department that is really benefited. The production department is potentially hurt the
most – the VP of purchasing and materials handling (directly related to production) receives her
bonus based on her ability to lower total material cost. However, the over forecasted sales will
result in overproduction of trailers which will thus result in much higher than needed production
costs. The financing department will have mixed results; they will benefit in that their bonus is
not affected as it is only determined by preparing the budgets on time, however, the heavy
borrowing that will have to be done in the beginning of the year to meet the production needs
due to over forecasted sales could negatively affect them throughout the rest of the year and into
the coming years.

Year-to-
ACTUAL VS PROJECTED
2010 2011 Year
SALES (Number of Trailers)
(Actual) (Projected) Growth
January 1983 2500 26.07%
February 3218 4000 24.30%
March 3981 5000 25.60%
April 3240 3000 -7.41%
May 1755 2000 13.96%
June 901 1000 10.99%
July 763 1000 31.06%
August 611 1000 63.67%
September 1622 2000 23.30%
October 1678 2000 19.19%
November 1439 2000 38.99%
December 2131 2500 17.32%
Total 23322 28000 20.06%
Average 23.92%

3. It can be estimated that 80% of the “Aluminum and Other Materials Cost” is made up by the
total purchasing cost. Also, given the wages and trailer production, it costs $240 in wages per
trailer produced (see below). Heat, light and power is calculated by taking the proportional
increase in trailer production and multiplying that by the total spend on HLP in the 6 months
($900,000) and spreading it evenly over the six month period.

BUDGET PROPORTIONS January February March April May June


Total Purchasing Cost $816,000.00 $1,056,000.00 $888,000.00 $552,000.00 $336,000.00 $240,000.00
Aluminum & Other Materials
Cost (Purchased Not Paid) $870,000.00 $1,320,000.00 $1,110,000.00 $690,000.00 $420,000.00 $330,000.00
% of Aluminum & Other
Materials Cost 94% 80% 80% 80% 80% 73%
Trailer Production 2600 4200 4600 2800 1800 1000
Wages $624,000.00 $1,008,000.00 $1,104,000.00 $672,000.00 $432,000.00 $240,000.00
Wages Per Trailer $240.00 $240.00 $240.00 $240.00 $240.00 $240.00

3a. Constant Production of 3000 Trailers

PRODUCTION BUDGET
January February March April May June Six Months
Production(trailers) 3000 3000 3000 3000 3000 3000 18000
Add: beginning inventory 1000 1500 500 -1500 -1500 -500 1000
Total available 4000 4500 3500 1500 1500 2500 19000
Less: budgeted sales 2500 4000 5000 3000 2000 1000 17500
Ending Inventory 1500 500 -1500 -1500 -500 1500 1500

PURCHASES BUDGET
January February March April May June Six Months
Trailer production 3000 3000 3000 3000 3000 3000 18000
Sheet metal needs per trailer 30 30 30 30 30 30 30
Total production needs 90000 90000 90000 90000 90000 90000 540000
Add: desired ending
inventory 45000 45000 45000 45000 45000 45000 45000
Total materials needs 135000 135000 135000 135000 135000 135000 495000
Less: beginning inventory 39000 45000 45000 45000 45000 45000 39000
Total sheet metal purchases 96000 90000 90000 90000 90000 90000 546000
Cost per square yard $8.00 $8.00 $8.00 $8.00 $8.00 $8.00 $8.00
Total cost $768,000.00 $720,000.00 $720,000.00 $720,000.00 $720,000.00 $720,000.00 $4,368,000.00

Aluminum & Other


Materials (Purchased Not
Paid) January February March April May June
Total Purchasing Cost $768,000.00 $720,000.00 $720,000.00 $720,000.00 $720,000.00 $720,000.00
Aluminum & Other Materials
Cost (Purchased Not Paid) $960,000.00 $900,000.00 $900,000.00 $900,000.00 $900,000.00 $900,000.00
% of Aluminum & Other
Materials Cost 80% 80% 80% 80% 80% 80%
CASH BUDGET
January February March April May June Six Months
Cash beginning balance $100,000.00 $100,000.00 $100,000.00 $162,352.00 $100,000.00 $100,000.00 $ 100,000.00
Add: cash collections $1,701,500.00 $2,528,600.00 $3,150,000.00 $3,650,000.00 $3,855,000.00 $2,297,000.00 $17,182,100.00
Total cash available $1,801,500.00 $2,628,600.00 $3,250,000.00 $3,812,352.00 $3,955,000.00 $2,397,000.00 $17,844,452.00
Less: cash disbursements
Aluminum &
other materials $850,000.00 $960,000.00 $900,000.00 $900,000.00 $900,000.00 $900,000.00 $5,410,000.00
Wages $720,000.00 $720,000.00 $720,000.00 $720,000.00 $720,000.00 $720,000.00 $4,320,000.00
Heat, light, & power $158,824.00 $158,824.00 $158,824.00 $158,824.00 $158,824.00 $158,824.00 $952,944.00
Equipment rental $390,000.00 $390,000.00 $390,000.00 $340,000.00 $340,000.00 $340,000.00 $2,190,000.00
Equipment purchases $300,000.00 $300,000.00 $300,000.00 $300,000.00 $300,000.00 $300,000.00 $1,800,000.00
Depreciation $250,000.00 $250,000.00 $250,000.00 $275,000.00 $275,000.00 $275,000.00 $1,575,000.00
Selling & admin $400,000.00 $400,000.00 $400,000.00 $400,000.00 $400,000.00 $400,000.00 $2,400,000.00
Total cash disbursements $3,068,824.00 $3,178,824.00 $3,118,824.00 $3,093,824.00 $3,093,824.00 $3,093,824.00 $18,647,944.00
-
Excess (deficiency) $1,267,324.00 -$550,224.00 $131,176.00 $718,528.00 $861,176.00 -$696,824.00 -$803,492.00
Financing
Borrowings $1,367,324.00 $650,224.00 $31,176.00 $0.00 $0.00 $0.00 $2,048,724.00
Repayments $0.00 $0.00 $0.00 -$618,528.00 -$761,176.00 $796,824.00 -$582,880.00
Interest -- -- -- -- -- --
Total financing $1,367,324.00 $650,224.00 $31,176.00 -$618,528.00 -$761,176.00 $796,824.00 $1,465,844.00
Cash balance ending $100,000.00 $100,000.00 $162,352.00 $100,000.00 $100,000.00 $100,000.00 $100,000.00

3b. Constant Production of 3500 Trailers

PRODUCTION BUDGET January February March April May June Six Months
Production(trailers) 3500 3500 3500 3500 3500 3500 21000
Add: beginning inventory 1000 2000 1500 0 500 2000 1000
Total available 4500 5500 5000 3500 4000 5500 22000
Less: budgeted sales 2500 4000 5000 3000 2000 1000 17500
Ending Inventory 2000 1500 0 500 2000 4500 4500

PURCHASES BUDGET
January February March April May June Six Months
Trailer production 3500 3500 3500 3500 3500 3500 21000
Sheet metal needs per trailer 30 30 30 30 30 30 30
Total production needs 105000 105000 105000 105000 105000 105000 630000
Add: desired ending
inventory 52500 52500 52500 52500 52500 45000 45000
Total materials needs 157500 157500 157500 157500 157500 150000 585000
Less: beginning inventory 39000 52500 52500 52500 52500 52500 39000
Total sheet metal purchases 118500 105000 105000 105000 105000 97500 636000
Cost per square yard $8.00 $8.00 $8.00 $8.00 $8.00 $8.00 $8.00
Total cost $948,000.00 $840,000.00 $840,000.00 $840,000.00 $840,000.00 $780,000.00 $5,088,000.00

Aluminum & Other Materials


(Purchased Not Paid) January February March April May June
Total Purchasing Cost $948,000.00 $840,000.00 $840,000.00 $840,000.00 $840,000.00 $780,000.00
Aluminum & Other Materials
Cost (Purchased Not Paid) $1,185,000.00 $1,050,000.00 $1,050,000.00 $1,050,000.00 $1,050,000.00 $975,000.00
% of Aluminum & Other
Materials Cost 80% 80% 80% 80% 80% 80%

CASH BUDGET
January February March April May June Six Months
Cash beginning balance $100,000.00 $100,000.00 $100,000.00 $100,000.00 $100,000.00 $100,000.00 $ 100,000.00
Add: cash collections $1,701,500.00 $2,528,600.00 $3,150,000.00 $3,650,000.00 $3,855,000.00 $2,297,000.00 $17,182,100.00
Total cash available $1,801,500.00 $2,628,600.00 $3,250,000.00 $3,750,000.00 $3,955,000.00 $2,397,000.00 $17,782,100.00
Less: cash disbursements
Aluminum &
other materials $850,000.00 $1,185,000.00 $1,050,000.00 $1,050,000.00 $1,050,000.00 $1,050,000.00 $6,235,000.00
Wages $840,000.00 $840,000.00 $840,000.00 $840,000.00 $840,000.00 $840,000.00 $5,040,000.00
Heat, light, & power $185,295.00 $185,295.00 $185,295.00 $185,295.00 $185,295.00 $185,295.00 $1,111,770.00
Equipment rental $390,000.00 $390,000.00 $390,000.00 $340,000.00 $340,000.00 $340,000.00 $2,190,000.00
Equipment purchases $300,000.00 $300,000.00 $300,000.00 $300,000.00 $300,000.00 $300,000.00 $1,800,000.00
Depreciation $250,000.00 $250,000.00 $250,000.00 $275,000.00 $275,000.00 $275,000.00 $1,575,000.00
Selling & admin $400,000.00 $400,000.00 $400,000.00 $400,000.00 $400,000.00 $400,000.00 $2,400,000.00
Total cash disbursements $3,215,295.00 $3,550,295.00 $3,415,295.00 $3,390,295.00 $3,390,295.00 $3,390,295.00 $20,351,770.00
-
Excess (deficiency) $1,413,795.00 -$921,695.00 -$165,295.00 $359,705.00 $564,705.00 -$993,295.00 -$2,569,670.00
Financing
Borrowings $1,513,795.00 $1,021,695.00 $265,295.00 $0.00 $0.00 $0.00 $2,800,785.00
Repayments $0.00 $0.00 $0.00 -$259,705.00 -$464,705.00 $1,093,295.00 $368,885.00
Interest -- -- -- -- -- --
Total financing $1,513,795.00 $1,021,695.00 $265,295.00 -$259,705.00 -$464,705.00 $1,093,295.00 $3,169,670.00
Cash balance ending $100,000.00 $100,000.00 $100,000.00 $100,000.00 $100,000.00 $100,000.00 $100,000.00

As can be seen from the budgets about, the constant production strategy’s biggest advantage is
that the production is constant making production much easier to manage. With this constant
production, a constant workforce is required which will help to increase both the productivity of
the workforce and their quality of work. The constant production will also make inventory
management much easier as production each month is constant; this would help the production
manager secure a prime vendor contract as the purchases required each month will now be the
same. Lastly, cash requirements for each month will be relatively the same, as the once
extremely varying costs month to month of aluminum and other materials, wages, and heat, light,
& power will now be the same each month.

The disadvantage of the steady production strategy is that finished goods inventory is very
volatile. With the production of 3000 trailers per month and based on the budgeted sales, Let’s
Go Aero will experience stock outs in the months of March, April and May, which can be very
costly and hurt the finance department. At other times, inventory is very high; for example, with
the production of 3500 trailers per month, ending finished goods inventory in June 4500 trailers,
which is 1000 more than the budgeted sales for that entire month. This is a drastic change from
three months prior, where based on budgeted sales, the company will experience ending
inventory of zero in the month of March. This means that any slight misforecasting could cause a
stock out, which again is very bad for sales.
Lastly, another disadvantage of this strategy is that the budgeted sales between the departments
vary drastically. For example, when production is based on sales, the budgeted sales for the six
months is 17,500 trailers but when the production department is producing 3,500 trailers constant
per month, the total production of trailers for that same six month period is 21,000. This
variation of 3,500 trailers would put a lot of pressure on the sales team which could potentially
harm them if they are not able to make the additional sales. Also, if changes in the market or
customer preference occur, it will be much harder for Let’s Go Aero to meet sales demands as
they will have excess inventory of already produced trailers that they will not be able to sell.

Therefore, the constant production budget benefits the production department. The sales
department will be hurt the most as the trailers produced will be more than their budgeted sales
(which are already forecasted very optimistically) and it is very likely sales will not be able to
meet this demand. Though managing expenses will be easier with constant numbers each month,
the increase in costs due to stock out situations and excess inventory will hurt the finance
department.

4. Currently, the bonus system used is flawed because it pins each department against the other
with very different goals. For example, the marketing and sales manager gets a bonus based on
sales, whereas the production manager gets a bonus for cutting down material costs. If you
produce fewer trailers, production costs are down. Yet, if you have fewer trailers to sell, your
sales will suffer. This system does not encourage cooperation and collaboration across teams.

Therefore, bonuses should be awarded based on a weighted system of individual goals and
overall company goals. For example, if production costs are down but there are still many
complaints that quality is poor, this will affect how the product manager is rewarded. This
weighted system would require collaboration and cooperation across teams to achieve company
goals. I think the finance, sales, and production departments need to get together to create the
budgets as well (i.e., finance should not be rewarded for completing a budget on time and
without bothering other managers). With the teams in the company working together, they could
accurately forecast sales so that they could employ a steadier production system that would help
to keep costs down and more constant, while avoiding stock out situations or severely over
producing.