Tata Travel Trailer
Question 1: Discuss the validity and reasonableness of Tata’s sales projections.
Tata’s sales projections are questionable. Although in year 1997, sales had an 18.27% increase compared to the last year, no additional evidence was provided to validate the 5- year average 20% sales increase. More information about market outlook, competition analysis, and industry research should be given consideration before supporting the projected sales increase.
Question 3: Advantage of preparing master budgets assuming stable production:
1. The purchase budget and cash budget are lot simpler, since the amount related to production is the same every month. The budgets assuming stable production benefit the production department, the purchase department, and the human resource department. It helps all these departments easily manage all kinds of resources and activities on a stable level.
Disadvantage of preparing master budgets assuming stable productions:
1. If sales are seasonal, stable productions may cause inventory under stock during the best sales season and may cause inventory overstock during the poor sales season. So the budgets assuming stable production would hurt the sales department, making the projected sales impossible to achieve. See the second set of budgets of this case.
2. Another downside of preparing master budgets assuming stable production is overproduction. In order to keep up the projected sales, Tata has to raise the production level from 3000 units to 3500 units. At the end of June, Tata already overproduces 3500 units (21,000 – 17,500). 3500 units of trailers will occupy the working capital about 630,000 (=3500*30*6). See the third set of budget in this case. At the end of June, Tata still has to borrow the funds. These budgets hurt the financing department by requiring an increase in borrowing capital.
Question 4:
Department Overall goal- incentive % Budget control- incentive % Performance- incentive % Total Bonus
Sales manager
Tata’s sales projections are questionable. Although in year 1997, sales had an 18.27% increase compared to the last year, no additional evidence was provided to validate the 5- year average 20% sales increase. More information about market outlook, competition analysis, and industry research should be given consideration before supporting the projected sales increase.
Question 3: Advantage of preparing master budgets assuming stable production:
1. The purchase budget and cash budget are lot simpler, since the amount related to production is the same every month. The budgets assuming stable production benefit the production department, the purchase department, and the human resource department. It helps all these departments easily manage all kinds of resources and activities on a stable level.
Disadvantage of preparing master budgets assuming stable productions:
1. If sales are seasonal, stable productions may cause inventory under stock during the best sales season and may cause inventory overstock during the poor sales season. So the budgets assuming stable production would hurt the sales department, making the projected sales impossible to achieve. See the second set of budgets of this case.
2. Another downside of preparing master budgets assuming stable production is overproduction. In order to keep up the projected sales, Tata has to raise the production level from 3000 units to 3500 units. At the end of June, Tata already overproduces 3500 units (21,000 – 17,500). 3500 units of trailers will occupy the working capital about 630,000 (=3500*30*6). See the third set of budget in this case. At the end of June, Tata still has to borrow the funds. These budgets hurt the financing department by requiring an increase in borrowing capital.
Question 4:
Department Overall goal- incentive % Budget control- incentive % Performance- incentive % Total Bonus
Sales manager