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

| January 30, 2017

Question
ISSN 1940-204X

Let’s Go Aero Travel Trailers: Incorporating the New Model
of the Organization into the Teaching of Budgeting
Sally Wright
University of Massachusetts-Boston

INTRODUCTION

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:

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.”

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.

THE RETIREE MARKET

MARKETING AND SALES

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

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.

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VOL. 4, N O. 1, ART. 3, MARCH 2011

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.

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.

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
IM A ED U C ATIO NA L C A S E JOURNAL

Aluminum
Other materials
Wages

January February March

$816,000

$1,056,000

$888,000

54,000

264,000

222,000

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

300,000

300,000

Equipment purchases

300,000

Depreciation

250,000 250,000 250,000

Selling & admin

400,000

Aluminum

400,000

400,000

April May June

$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.

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VOL. 4, N O. 1, ART. 3, MARCH 2011

COMPETITION

CASH

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%.

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.

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.

PRODUCTION BUDGET

REQUIRED
1. iscuss the validity and reasonableness of Let’s Go’s sale
D

projections.
2. repare production, purchasing, and cash budgets for Let’s
P

Go for the first six months of 2011 using the formats below.
(hint: spreadsheet programs are wonderful!):

Jan

Feb

March

April

May

June

Six Months

Total needs

——-

——-

——-

——-

——-

——-

——-

Less: beginning inventory

——-

——-

——-

——-

——-

——-

——-

Budgeted Sales
Add: desired ending inventory

Trailer production

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VOL. 4, N O. 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
Cash beginning balance

Jan

$____

Feb

March

April

May

June

Six Months

$____

$____

$____

$____

$____

$____

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

$

$

$

$

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?

$

$

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?

3. ndy Baxter, newly hired by Let’s Go Aero from a
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
IM A ED U C ATIO NA L C A S E JOURNAL

$

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VOL. 4, N O. 1, ART. 3, MARCH 2011

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

EXHIBIT 1.
ACTUAL AND PROJECTED SALES IN NUMBER OF TRAILERS
Actual sales

Projected sales

2005
13,765
2011
28,000

2006 2007 2008
14,880 15,991 17,809
2012

2013

2014

33,600 40,320 48,384

4. hat metric should Let’s Go use to measure the
W

2009 2010
19,634 23,322
2015
58,060

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

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
Actual

2011
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

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October

1,678

2,000

November

1,439

2,000

December

2,131

2,500

23,322

28,000

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Total number of trailers

IM A ED U C ATIO NA L C A S E JOURNAL

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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VOL. 4, N O. 1, ART. 3, MARCH 2011

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