Travel-Space Trailers: A Budgeting Experience

Excel Sheet has all directions. Exhibits/Extra Info are also in the pdf. Please show work on excel!

ISSN 1940-204X
Travel-Space Trailers: A Budgeting Experience
Nicholas J. Fessler
Gordon Ford College of Business
Western Kentucky University
Christine A. Denison
Debbie and Jerry Ivy College of Business
Iowa State University
INTRODUCTION
The year is 2021. Travel-Space Trailers manufactures teardrop-style travel trailers bought primarily
by young families and retirees interested in a light, low-cost trailer that can easily be pulled by a midsized family car. The market for travel trailers has expanded nicely over the past few years because
of the number of families seeking a relatively low-cost, outdoor vacation experience. Due to the
COVID-19 virus, sales of travel trailers “exploded” in 2020 with dealership sales as much as 170%
higher than the prior year. But in the view of Travel-Space Trailers’ president, Shane Moynihan, the
real growth in the future is the retiree market.
Shane, the second president of Travel-Space Trailers, took over leadership of the family business
from his father Paul Moynihan, who retired six years ago and owns the company. Paul prefers to take a
hands-off approach in his role as owner, as he trusts his son Shane to handle the business. Shane grew
up hanging out at the factory and worked several different jobs. He also worked for Travel-Space
Trailers every summer during college. He was a mediocre student at Central State University (CSU),
where he earned a bachelor’s degree in management.
Shane believes that the vigorous health of the average retiree, coupled with the national trend toward
a return to nature, will translate into continuing sales growth for Travel-Space Trailers. As Shane
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 retiree market continues growing every day.”
THE RETIREE MARKET
The retiree market carries a lot of consumer clout, and 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 20 years. Retirees also make up a significant part of the total U.S.
population. According to the U.S. Census Bureau, in 2017 retirees represented 47.8 million individuals
and 14.9% of the populace. Florida has the highest percentage of senior citizens, but California has
the greatest number of people who are 65 years of age and older, followed by Florida, New York,
Pennsylvania, and Texas.
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Research indicates that for an organization to meet the needs of the senior market, the following must
be addressed:
1. Independence and control,
2. Intellectual stimulation and self-expression,
3. Security and peace of mind, and
4. Quality and value.
Seniors respond to benefit-driven messages; to attract them, advertising must communicate tangible
benefits rather than features and amenities.
COMPETITION
All forms of vacation and leisure activities, including theme parks, beach or cabin rentals, health
spas, resorts, and cruise vacations, compete with Travel-Space 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 Camp also offer
moderate-to-low-priced travel trailers. 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 Travel-Space Trailers 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 RV by more than 60% and labor costs by 78%.
THE SALES FORECAST
The forecasted increase in Travel-Space Trailers unit sales can be seen in the company’s sales
projections. Exhibit 1 shows actual sales for the years 2015 through 2020 and projected sales for the
years 2021 through 2025.1
Although weather, such as hurricanes, flooding, and droughts, can have a significant effect on the travel
trailer industry), Travel-Space Trailers’ management believes these problems will be mitigated in the
future by global warming. All sales projections are made by Shane as Travel-Space Trailers’ president.
FORECASTED INVENTORY LEVELS
A love of travel can sometimes lead to love in real life. Nichole Volante’s love of the outdoors led
her to a job as the administrative assistant for Shane. Two years later, the two were married. Despite
Nichole’s lack of business education, Shane saw in Nichole an outstanding aptitude for sales and
leadership, and he quickly made her the vice president of marketing and sales.
Nichole was primarily concerned about maximizing sales volume. To keep from losing sales, Nichole
directed the company to maintain finished goods inventory on hand at the end of each month equal
to a specified percentage of the next month’s sale. Exhibit 2 shows the formula, and the budgeted
finished goods inventory on December 31, 2020.
1
Exhibits are included in the Excel file provided with the case.
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Brent Sloan, Travel-Space Trailers’ production manager, disagrees with Nichole and is always trying to
get her to consider adopting flexible inventory levels. Brent, a grizzled veteran, has been a production
manager for more than 20 years in three different industries. Nichole refuses to talk to Brent, as
she is certain his suggestion would negatively affect her yearly bonus of up to 20% based on sales.
Nichole received the entire 20% in 2020 as sales were up. Adding fuel to the proverbial fire, Shane
refused to give Brent his bonus due to the high number of customer complaints about product quality,
even though Brent felt it was earned because actual trailer production met or exceeded the budgeted
production amount for the year, which was supposed to be the criteria for earning his bonus. Brent has
started browsing employment websites.
MATERIALS PURCHASES
Sheet aluminum represents the company’s single most expensive raw material. Exhibit 3 shows the
specific amount of aluminum required for each trailer and costs per square yard. The wholesale cost
of sheet aluminum varies dramatically according to the time of year. The cost per square yard can vary
from season to season, as new construction tends to start in the spring, and in December and January,
travel and, therefore, demand is lowest (see Exhibit 3).
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 80% of the country, yet they are largely concentrated
in four regions: the Pacific Northwest, the industrial Midwest, the Northeastern Seaboard, and the
mid-South. Although this is a broad geographic presence, Travel-Space Trailers will be affected by
distribution costs.
Jazmine Caple is Travel-Space Trailers’ recently hired vice president of purchasing and materials
handling. Jazmine is eager to implement a just-in-time (JIT) inventory system as a way of lowering
Travel-Space Trailers’ aluminum cost. To offset the expense of distribution, Travel-Space Trailers is
in Pennsylvania. Shane told Jazmine when she was hired that she would receive a bonus based on her
ability to lower total material cost. Assuming the success of Jazmine’s efforts, Shane has instructed the
Accounting department to budget aluminum for a specific dollar amount per square yard (see Exhibit 4).
Initially enthusiastic about her job and ability to earn a significant bonus, Jazmine has since become
discouraged and angry. She is unable to convince Travel-Space Trailers’ current aluminum suppliers
to sign a prime vendor contract, and her efforts to locate an alternative vendor willing to accept the
conditions of a JIT contract have similarly failed. She blames Brent. Travel-Space Trailers’ current
aluminum vendor refuses to sign a JIT prime vendor contract due to Brent’s uneven production schedule.
But Jazmine is also frustrated with the Accounting department, which does not seem to be able to
consistently pay vendors in a timely manner, and potential vendors are aware of this reputation.
Jazmine’s frustrations are giving her second thoughts about having accepted what once appeared to
be an exciting employment opportunity.
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In keeping with the policy set by Brent, the amount of aluminum on hand at the end of each month
must be equal to a specific percentage of the following month’s production needs for sheet aluminum
(see Exhibit 5). The budgeted amount of raw materials inventory on December 31, 2020, appears in
Exhibit 5. 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 provided in Exhibit 6.
Accounts for aluminum and other materials are paid in full the month following their purchase.
Accounts payable for aluminum and other materials purchased during December 2020 are described
in Exhibit 7. These amounts will be paid in January 2021.
BUDGET PREPARATION
To minimize company time lost on clerical work, Travel-Space Trailers’ Accounting department
prepares and distributes all budgets to the various departments every six months. Shane said, “Freeing
departmental managers from the budgeting process allows them to concentrate on more pressing
matters.” The accounting manager, Paola Rodriguez, recently received a 20% bonus for having
prepared the budgets on time with little or no help from the other functional areas. Paola played
competitive golf during college and is known around the company for her “golf mornings,” when she
arrives at the office late due to her need to practice and keep her game sharp.
Careful analysis of the budget that Paola prepared will reveal that she increased the average budgeted
selling price per trailer in May; she wonders if any of her colleagues will notice. Paola is also responsible for
the other accounting activities of Travel-Space Trailers, including accounts payable and accounts receivable.
CASH
Travel-Space Trailers’ vice president of finance is Trey Jernigan, a fraternity brother of Shane’s while
at CSU. Trey has requested a short-term loan from the bank at a yet-to-be-determined interest rate
(see Exhibit 8). Since Travel-Space Trailers has had trouble 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 the
minimum cash balance required by Travel-Space Trailers’ board of directors (see Exhibit 8).
HUMAN RESOURCES
To accomplish the company’s corporate strategic goals, Travel-Space 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. As Travel-Space
Trailers’ president, Shane 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, Shane 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.
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ADDITIONAL INFORMATION
Unit sales for 2020 (actual) and 2021 (projected) by month are in Exhibit 9.
Actual sales in dollars for the last two months of 2020 and budgeted sales in dollars for the first six
months of 2021 are in EXHIBIT 10. Experience shows the pattern of sales collection (see Exhibit 11).
Shane plans to replace all rented equipment with owned equipment over the next three years.
Equipment rental expense dropped from March to April due to the acquisition of owned equipment
and the fact that equipment rental agreements are adjusted quarterly. The replacement of rental with
owned equipment will also increase depreciation expense on the income statement starting in April.
Yun Li, an intern newly hired by Travel-Space Trailers, suggests preparing the production budget
assuming stable production (see Exhibit 12).
YOUR ROLE
Owner Paul is aware that Travel-Space Trailers is experiencing difficulties, and he has hired you, an
independent consultant, to investigate. Write a letter to Paul explaining your recommendations. Paul
is not likely to respond to lots of raw numbers, so develop and include in your letter data visualizations
that will convince him to intervene and make the changes that you recommend.
EXHIBITS
If your instructor has provided you with alternative data values, be sure to use the alternative data.
EXHIBIT 1. ACTUAL AND PROJECTED SALES IN NUMBER OF TRAILERS
Actual Sales
Projected Sales
2015
2016
2017
2018
2019
2020
13,765
14,880
15,991
17,809
19,634
23,322
2021
2022
2023
2024
2025
28,000
33,600
40,320
48,384
58,060
EXHIBIT 2. FINISHED GOODS INVENTORY
Budget: December 31, 2020
1,000 trailers
Current finished goods
300 trailers *plus*
Inventory formula
+
20%
of the next month’s sales
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EXHIBIT 3. SHEET ALUMINUM
V
Trailer requirements
30.0 square yards
Cost per square yard in the Spring Current finished goods
$15.00
Cost per square yard in December/January
$8.00
EXHIBIT 4. SHEET ALUMINUM BUDGETED COST
$8.00 cost per square yard
EXHIBIT 5. RAW MATERIALS INVENTORY
Sheet aluminum on hand at the end of each month
50.0% of the following month’s production needs
Raw materials inventory budget December 31, 2020
39,000 square yards
EXHIBIT 6. BUDGETED EXPENSES FOR THE FIRST SIX MONTHS 2021
January
February
March
$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
Aluminum
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EXHIBIT 7. ACCOUNTS PAYABLE FOR ALUMINUM AND
OTHER MATERIALS PURCHASED DURING DECEMBER 2020
A/P: Aluminum
$700,000
A/P: Other materials
$150,000
EXHIBIT 8. BANK LOAN DETAILS / MINIMUM CASH
BALANCE REQUIRED
Requested loan amount
$800,000
Loan duration (in days)
90
$100,000
Mininum cash balance required by directors
EXHIBIT 9. ACTUAL 2020 AND PROJECTED 2021 SALES
2020 Actual
2021 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 Trailers
23,322
28,000
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EXHIBIT 10. ACTUAL AND BUDGETED SALES
November 2020 (actual)
$1,439,000
December 2020 (actual)
$2,131,000
January 2021 (budgeted)
$2,500,000
February 2021 (budgeted)
$4,000,000
March 2021 (budgeted)
$5,000,000
April 2021 (budgeted)
$3,000,000
May 2021 (budgeted)
$2,200,000
June 2021 (budgeted)
$1,100,000
EXHIBIT 11. ACCOUNTS RECEIVABLE COLLECTION SCHEDULE
Of a month’s sales collected in:
Month of sale
25%
Month following sale
10%
Second month following sale
60%
– The remainder is uncollectible –
EXHIBIT 12. SUGGESTED CONSTANT PRODUCTION LEVELS
First suggested level
3,000
Second suggested level
3,500
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ORIGINAL CAS
Do not make changes t
EXHIBIT 1.
ACTUAL AND PROJECTED SALES IN NUMBER OF TRAILERS
Actual Sales
2015
2016
2017
2018
13,765
14,880
15,991
17,809
Projected Sales
2021
28,000
2022
33,600
EXHIBIT 2.
FINISHED GOODS INVENTORY
Budget: December 31, 2020
Current finished goods
inventory formula
2023
40,320
2024
48,384
2019
19,634
2020
23,322
2025
58,060
1,000 trailers
+
EXHIBIT 3.
SHEET ALUMINUM
Trailer requirements
Cost per square yard in the Spring
Cost per square yard in December/January
300 trailers *plus*
20% of the next month’s sales
30.0 square yards
$ 15.00
$ 8.00
EXHIBIT 4.
SHEET ALUMINUM BUDGETED COST
$
8.00 cost per square yard
EXHIBIT 5.
RAW MATERIALS INVENTORY
Sheet aluminum on hand
at the end of each month
Raw materials inventory budget
December 31, 2020
50.0% of the following month’s
production needs
39,000 square yards
ORIGINAL CASE FACTS
Do not make changes to these numbers
EXHIBIT 6.
BUDGETED EXPENSES FOR THE FIRST SIX MONTHS 2021
January
February
Aluminum
$
816,000 $
1,056,000 $
Other materials
54,000
264,000
Wages
624,000
1,008,000
Heat, light, & power
130,000
195,000
Equipment rental
390,000
390,000
Equipment purchases
300,000
300,000
Depreciation
250,000
250,000
Selling & admin
400,000
400,000
Aluminum
Other materials
Wages
Heat, light, & power
Equipment rental
Equipment purchases
Depreciation
Selling & admin
$
April
552,000 $
138,000
672,000
135,000
340,000
300,000
275,000
400,000
May
336,000 $
84,000
432,000
110,000
340,000
300,000
275,000
400,000
March
888,000
222,000
1,104,000
220,000
390,000
300,000
250,000
400,000
June
240,000
90,000
240,000
110,000
340,000
300,000
275,000
400,000
EXHIBIT 7.
ACCOUNTS PAYABLE FOR ALUMINUM AND OTHER MATERIALS
PURCHASED DURING DECEMBER 2020
A/P: Aluminum
$
700,000
A/P: Other materials
$
150,000
EXHIBIT 8.
BANK LOAN DETAILS / MINIMUM CASH BALANCE REQUIRED
Requested loan amount
$
Loan duration (in days)
800,000
90
Mininum cash balance required by directors
100,000
$
EXHIBIT 9.
ACTUAL 2020 AND PROJECTED 2021 SALES
2020
2021
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 Trailers
23,322
28,000
EXHIBIT 10.
ACTUAL AND BUDGETED SALES
November 2020 (actual)
December 2020 (actual)
January 2021 (budgeted)
February 2021 (budgeted)
March 2021 (budgeted)
April 2021 (budgeted)
May 2021 (budgeted)
June 2021 (budgeted)
$ 1,439,000
$ 2,131,000
$ 2,500,000
$ 4,000,000
$ 5,000,000
$ 3,000,000
$ 2,200,000
$ 1,100,000
EXHIBIT 11.
ACCOUNTS RECEIVABLE COLLECTION SCHEDULE
Of a month’s sales collected in:
Month of sale
Month following sale
Second month following sale
– The remainder is uncollectible EXHIBIT 12.
SUGGESTED CONSTANT PRODUCTION LEVELS
First suggested level
Second suggested level
25%
10%
60%
3,000
3,500
PRODUCTION BUDGET
Feb
March
April
1,100
1,200
1,300
Jan
Budgeted sales
Add: desired ending inventory
Total needs
Less: beginning inventory
Trailer production
1,000
220
1,220
(200)
1,020
1,100
(220)
880
Jan
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
$
Feb
1,020
15
15,300
April
CASH BUDGET
March
April
880
–
–
Jan
Cash beginning balance
Add: cash collections
Month of sale
Month following sale
Second month following sale
Total cash collections
Total cash available
Less: cash disbursements
Aluminum
Other materials
Wages
Heat, light, & power
Equipment rental
Equipment purchases
Selling & admin
Total cash disbursements
Excess (deficiency)
Financing:
Borrowings: Original
Borrowings: Additional
Repayments
Interest
To be invested (excess)
Total financing
PURCHASES BUDGET
March
Feb
January
December
November
$
$
$
–
$
$
–
$
–
March
February
January
$
–
Cash balance ending
$
–
$
–
May
1,400
June
1,500
320
Six Months
7,500
320
(200)
May
June
Six Months
May
June
Six Months
Steps/Hints
1. Use sales from Exhibit 9 (units) and Sales dollars – Ex
2. Use desired inventory from Exhibit 2
3. Beginning inventory is given in Exhibit 2, and beginn
4. Sheet metal required is Exhibit 3 and cost is provided
5. Ending iinventory for raw materials provided in Exhib
6. Collections pattern is provided in Exhibit 11
7. Expenses are provided in Exhibit 6 and Exhibit 7 prov
8. Borrowing and minimum cash balance provided in Ex