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Q1) Discuss the validity and reasonableness of Let’s Go’s sale projections. The sales projections made by Mark Newman are not reasonable reasonable for the followin reasons.
, consistent and stable rowth rate of !"- is very optimistic and unrealistic. Granted& by !"$"& the sales had increased up to around $+-. owever& the rate of rowth cannot be sustained as the rowth of the retiree market does not necessarily translate to an e/uivalent rowth in sales for Let’s o. 0oachman 0oachman 12 is currently currently the leader in the trailer market and Let’s Go does not seem to have considered the rowth of competition in their forecast. 3f the market rows at the e4pected e4pected rate& it will also result in an increase increase in number of competitors. competitors. Let’s Let’s Go has not prese presente nted d an altern alternati ative ve strate stratey y to combat combat marke markett compet competitio ition n and this this makes their sales forecasts 5awed. There seems to be no co6ordination amon the various departments at Let’s Go. The produc productio tion n depart departmen mentt dis disar arees ees with with marke marketin tin 7 sales sales over over the /uality /uality of the product. 3f the hih number of customer complaints are due to the poor /uality of product& this is oin to seriously impact the sales projections. Mark Newman& the president& has not consulted his departments over the problem and this further makes the projections less reliable. The reasonin iven by Let’s Go’s manaement that the weather problems will be mitiated in the future by lobal warmin is fundamentally 5awed. Global 8armin is oin to contribute to increased and erratic weather we ather problems& not mitiate them. 3f the baby boomers are e4pected to inherit 9$)69!" trillion tril lion dollars& they are more likely to switch to hih end market of trailers and not buy low6cost trailers.
purchasin& and cash budets for Let’s Go for the ;rst si4 months of Q2) :repare production& purchasin& !"$$ usin the formats below.
Production Budget ? Desired Andin @ 3nventory
!otal "eeds >6 @
!railer Production Purchases Budget Trailer :roduction =heet Metal needs per trailer !otal Production "eeds Desired Andin 3nventory
The inventory re/uirement for ;nished oods will be at its optimum level. This ensures that inventory carryin costs are their minimum. 3t also ives a structure to the cash cycle of the company& by establishin estimated time and amount of in5ow and out5ow of money& for production runs or for purchases& and allows the company to plan its activities based on the budets. 3t helps identify potential problem areas for the company >such as capacity shortae& cash shortae& raw material shortae@ and ives it time to rectify those issues. :erhaps the most important advantae of this approach is that it helps to prevent a stock6out situation at the company. The budeted sales ;ures provide an estimate of the market demand of the product& and the e4pected inventory is a standard set by the department to adjust for the variability in this demand. Thus& the company can mitiate this risk and have stock available in case the demand is hiher than e4pected.
The disadvantaes of this stratey areB
These budets are estimates& and estimates may sometimes be very misleadin and make the entire plannin process counter6productive. The labour force needs to be constantly readjusted to match the varyin production demands. There is also a threat of variation in eCciency and /uality of product due to constant turnover of workforce. This makes inventory manaement diCcult& as it becomes diCcult to manae dispatch and warehousin schedules if the inventory /uantity keeps varyin. The cash re/uirements can be predicted but they are variable& meanin there will be a hiher re/uirement for cash in one month as compared to others. Manain this 5uctuatin need for cash becomes diCcult for the ;nance department.
Therefore& this budet will help the sales department because there will be no stockouts. 3t will hurt production department because they always have to catch up to the chanin schedule. The ;nance department will have mi4ed results. The cash cycle is shortened due to a lower inventory which in6turn reduces the workin capital re/uirements. owever& the ;nance department has to manae variable cash re/uirements for the variable production schedule& therefore cash manaement becomes challenin.
Q#) :repare a second and third set of production& purchasin& and cash budets.
#&&& 0"I!S Production Budget :roduction >Trailers@ > ? 6 @
Janu Febru Mar Jun !ota ary ary ch Aril May e l #$&& #$&& #$& #$& #$& #$& 1*$ & & && && && && &&& $&"" " +$&& & !&#" " 1$'& &
Purchases Budget Trailer :roduction =heet Metal needs per trailer !otal Production "eeds > ? @
Desired Andin 3nventory
!otal Material "eeds >6 @
!otal ,ost
,ash Budget 0ash beinnin
$&#"" +$'& & )&"""
'&&
#"" #$' && #&"" " 1$' &&)
>$&# ""@ 1$' && %&"" " 1$' &&)
Marc h
>$&# ""@ 1$' && !&"" " '& &)
>#" "@ 2$' && $&" "" 1$' &&
$&"" " 1($ &&& $'&# "" 1$' &&
Janua ry
Febru ary
%&"""
%&"""
%&"""
%&"""
%&"""
%" (&$& &&
%" (&$&& &
%" (&$& &&
%" (&$& &&
%" (&$& &&
%" (&$& &&
)#&"" " 1#'$ &&& %+&"" " ($& && * *$ &&&
)#&"" " 1#'$& && )#&"" " (&$&& & * 2&$& &&
)#&"" " 1#'$ &&& )#&"" " (&$& && * 2&$ &&&
)#&"" " 1#'$ &&& )#&"" " (&$& && * 2&$ &&&
)#&"" " 1#'$ &&& )#&"" " (&$& && * 2&$ &&&
)#&"" " 1#'$ &&& )#&"" " (&$& && * 2&$ &&&
Aril
May
June
!otal 1*$&& %&""" & %" '+&$& &&
)#&""" '*'$& && %+&""" '+$& && * +$#*$ &&&
Februa January ry March Aril May June !otal $""&""" $""&"" $""&"" $""&"" $""&"" *('&$# $""&"""
The cash disbursements for aluminium are based on the revised purchase budet prepared. ther materials are considered as a percentae of aluminium cost and are assumed to increase in the same proportion. 8aes and eat& Liht 7 :ower have been assumed to increase in the proportion of units produced and have been spread e/ually over the ( months. A/uipment rental& e/uipment purchases and sellin and admin e4penses have been assumed to be unchaned >;4ed e4penses@
The cash disbursements for aluminium are based on the revised purchase budet prepared. ther materials are considered as a percentae of aluminium cost and are assumed to increase in the same proportion. 8aes and eat& Liht 7 :ower have been assumed to increase in the proportion of units produced and have been spread e/ually over the ( months. A/uipment rental& e/uipment purchases and sellin and admin e4penses have been assumed to be unchaned >;4ed e4penses@
Ad-antages o3 this strategy The advantaes of this stratey are as follows B •
•
The constant levels of production per month make it easier for the production department as the work force re/uired is constant. 3t also ensures that there is no variation in eCciency levels and /uality of product as there is no turnover of labour. 3t makes inventory manaement easier as the scheduled production will be constant& and thus the inventory manaer will not have to adjust his schedules for the variability of production.
•
3t makes cash manaement easier as the re/uirements for cash will be constant because of a ;4ed production level.
The disadvantaes of this stratey areB
,t %""" units per month& there are stock outs in the month of March& ,pril and May. This results in delay of delivery of oods for the customer and damae to the reputation of the company. This is a serious concern for the company as they are already receivin complaints from the customers about the /uality of their product. Delay in delivery of oods will only make the matters worse. 0onversely& at %#"" units per month& there are )#"" units in stock by the end of Eune. This means that the company will have to bear hih carryin costs for each month that the units remain unsold.
Therefore& the constant production budet will help the production department. 3t will hurt the sales department due to potential stockouts. The ;nance department will also be aFected adversely due to the increase in workin capital re/uirements. n the 5ip side& havin a ;4ed cash re/uirement will make their job slihtly easier.
Q+) 8hat metric should Let’s Go use to measure the performance of each manaer in this case 8hat bonus system would you suest that incorporates these measures and also encouraes the manaers to work as a team The current system of awardin bonuses is creatin a rift between manaers as their performance are juded in isolation. , metric that may be favourable for the purchasin manaer may not be favourable for the production manaer. Hor e4ample& the purchase manaer is awarded a bonus based on her ability to lower the material cost. Thouh the just6 in6time inventory system is ood for the company and for the purchasin manaer& she cannot implement it because the production department and sales department are not in favor of the system. The sales department would want hih ;nished oods inventory to eliminate the possibility of lost sales. 8hile the ;4ed production stratey would help solve the problems of labor supply and material cost& it would lead to overIunder production discussed earlier. To tackle this problem& the budets should be made in co6ordination of all the departments and not just with the input of one department. ,ll departments need to be involved and the manaement needs to make sure that the strateies of departments don’t contradict each other. This will result in increased accuracy of budets and realistic yardsticks for performance appraisals. 3t will also help the company to prepare a uni;ed marketin stratey& cost stratey& and production stratey thereby eliminatin inter6departmental disputes. The appraisal and reward system should be devised in a manner that promotes the cooperation and coordination amon the diFerent functional units. The company should have an evaluation system based on individual department oals and company oals. ,n appropriate method would be to ive a hiher weihtae to company oals >A.B '"6%"@. Hurthermore& the oals should be set by the top manaement with a lon6term view in mind.
