Scamp Travel Trailers Budgeting
INTRODUCTION
Scamp Travel Trailers manufacturers recreational trailers. They are purchased predominately by retirees and young families interested in a light, low-cost trailer than can easily be pulled by a mid-sized family car. The market for travel trailers has greatly expanded over the past few years due to the number of families seeking a relatively low-cost, outdoor vacation experience. But in the view of Scamp Travel Trailers president, Dan Troia, the real growth in the future is in the retiree market. Troia 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 Scamp. As Troia 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 provide a lot of business for Scamp. According to the National Opinion Research Center at Florida State University, 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 Scamp 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 rental of travel trailers), Scamp's management believes these problems will be mitigated in the future by global warming trends. All sales projections are done by Dan Troia in his role as Scamp'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, 2010, was budgeted to be 1,000 trailers. James West, Scamp's vice president of marketing and sales, would rather see a minimum finished goods inventory of no less than 1,500 trailers. James refuses to talk to Thomas Sloan, Scamp's production manager. Thomas is always trying to get James to consider adopting flexible inventory levels, which James is certain would affect his yearly bonus. The vice president of sales and marketing is eligible for a 20% bonus based on sales. Unfortunately, James did not receive a bonus in 2010. Sales were up, but Dan refused to give James the bonus, although it was earned, due to the high number of customer complaints. James was really angry when he heard "no bonus." Didn't Dan know those complaints were for poor quality? All of James' efforts to grow sales and attract customers were, once again, destroyed by Thomas 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. Because this is a broad geographic presence, Scamp will be affected by distribution costs.
Becky Dolop, Scamp's vice president of purchasing and materials handling, is eager to implement just-in-time as a way of lowering Scamp's aluminum cost. To offset the expense of distribution, Scamp is located in Pennsylvania. Becky's projected 20% bonus, recently announced by Dan 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, Becky has become discouraged and angry. She is unable to convince Scamp'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 Thomas Sloan. Scamp's current aluminum vendor refuses to sign a just-in-time prime vendor contract due to Thomas' uneven production schedule and his refusal to pay on time. Thomas has been seen reading the help wanted ads, and Becky over heard him talking to an employment agency.
In keeping with the policy set by Thomas as Scamp'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
|
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.
COMPETITION
All forms of vacation and leisure activities, including theme parks, beach rentals, health spas, resorts, and cruise vacations compete with Scamp 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 Let's Go 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 Scamp 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, Scamp's accounting department prepares and distributes all budgets to the various departments every six months. Per Dan Troia, "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, Troia has instructed the accounting department to budget aluminum at $8 per square yard. 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
Scamp's vice president of finance, Becky Newman, has requested an $800,000, 90 day loan from the bank at a yet to be determined interest rate. Since Scamp 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 Scamp's board of directors).
HUMAN RESOURCES
To accomplish the company's corporate strategic goals, Scamp 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. Troia, as Scamp'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, Troia 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
- Discuss the validity and reasonableness of Scamp's sale projections.
- Prepare production, purchasing, and cash budgets for Scamp for the first six months of 2011.
- 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?
- Andy Baxter, newly hired by Scamp 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 at a constant 3,000 trailers per month for the second set of budgets, and 3,500 trailers for the month for the third set of budgets.
- 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?
- What metric should Scamp 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?
- Discuss potential animosity between sales and production. How should a company best curb the friction between the departments? Why is there friction between these departments?
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
EXHIBIT 2: DETAIL SALES FOR 2010 (ACTUAL) and 2011 (PROJECTED) BY MONTH
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
October 1,678 2,000
November 1,439 2,000
December 2,131 2,500
Total number of
Trailers 23,322 28,000
EXHIBIT 3: ACTUAL SALES IN DOLLARS FOR LAST TWO MONTHS OF 2010 AND BUDGETED SALES FOR FIRST SIX MONTHS OF 2011
November, 2010 $1,439,000
December, 2010 $2,131,000
January, 2011 $2,500,000
February, 2011 $4,000,000
March, 2011 $5,000,000
April, 2011 $3,000,000
May, 2011 $2,200,000
June, 2011 $1,100,000
FINAL NOTE: Past experience shows 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.