Answer question 2 and 3.

Darnell Manufacturing Company Mr. Darnell had promoted Jimmy Mack to vice president of finance. Jimmy had practically been running the firm for several years during which time sales and profit had been declining. On November 15, Mr. Darnell announced that his son, Robert Darnell, would take over as owner and president on January 1. Robert was a graduate of an MBA program and for several years had been working for a large consulting firm as a marketing specialist. In their private discussions, Mr. Darnell told his son that the problems in the family firm were marketing rather than financial, so the situation was ready made for Robert. Mr. Darnell, it seems, had been completely taken in by Jimmy Mack. When Robert arrived on December 1, and began to read various internal reports, he realized Darnell Manufacturing did not have a cash budget, and there didn't seem to be much in the way of financial planning. Robert asked Jimmy about this. Jimmy's response was that Darnell Manufacturing ran on the basis of several well-developed decision rules, and budgets weren't necessary because if the firm ever ran out of funds, Mr. Darnell simply deposited $10,000 or $20,000 in the bank. Robert's response was clear: "My father is a millionaire, but I am not!" Jimmy indicated he didn't know much about budgeting, but he would get an assistant to work up some "stuff." Robert decided to call his old friend Bailey Edison. Edison was in charge of several large budgeting projects for a consulting firm, and Robert knew Bailey to be a recognized expert on budgeting for small companies. Fortunately for Robert, Edison wasn't busy that week and was able to fly down the next day Edison spent two days going over the accounting records, interoffice memos, and everything else he could find. On Friday morning, Robert found the following note on his desk: Dear Robert: Had to leave last night for Pittsburgh. During the two days I spent in the office, I discovered: You have no budget or control system in place. 3 2. Jimmy Mach's decision rules are all wrong. Mack doesn't know the first thing about finance, budgeting or manufacturing. Will be back on Monday morning to talk to you. By the way, if you can find Alice Mead, I would like to speak to her. Your friend, Bailey EdisonRobert was perplexed by the note but decided he had better find out who this Alice Mead was. Jimmy told Robert that Alice was a file clerk who had been fired a couple of years ago because she refused to follow company policy. Robert asked Jimmy if he could find Alice. Jimmy said he heard she was working for some firm in town and would find out where. Eventually, Robert found Alice working as a bookkeeper for Mark Wolsey. During a phone conversation Alice explained about her being fired by Mr. Darnell. She went on to explain hat after she got fired she went to see Mr. Wolsey, who was one of Darnell's customers. Apparently, Wolsey realized that Alice was right and that Jimmy Mack and Mr. Darnell were wrong. Alice went on to say that Mr. Wolsey felt bad that she had been fired. Wolsey had intended to retire but decided to hire Ms. Mead as a bookkeeper. Alice had been working for Wolsey ever since. Shortly after Robert finished talking with Alice, Edison entered the office. With his usual efficiency, he made the following points: We had better get a budgeting system immediately and try to see where we are. . Jimmy has to go. . We must decide on how to get a budgeting system put together quickly because Darnell's might be broken. Edison concluded by asking: "Did you find Alice Mead? She is the only person around here in the last three years who did anything right, and she got fired." Robert indicated that Ms. Mead was going to stop by after work and talk to them. Edison then suggested that Robert fire Jimmy Mack and try to rehire Alice as the bookkeeper-analyst. That afternoon Jimmy was fired, given two months pay, and asked to leave the office by 3 o'clock. The same evening Alice agreed to work for Robert on the condition that she would not have to deal with either the older Mr. Darnell or Jimmy Mack. Robert explained that Jimmy was already gone, and his father left for Florida several days previously. Alice agreed to be at work the following Monday morning. She indicated that Mr. Wolsey was all but out of business and no longer needed her services After Jimmy Mack had left the office, Bailey Edison went through all the available records and files, as a result, was able to establish the information presented in Exhibit A as a basis to begin the budgeting process.Exhibit A Variable Direct Costs Direct materials cost per unit Direct labor costs per unit $ 0.75 1.25 Total $ 2.00 Variable Overhead Indirect labor cost per unit $ 0.20 Electricity cost per unit 0.10 Other overhead cost per unit produced 0.50 Total $ 0.80 Fixed Costs Indirect labor per week $ Indirect material per week 100 300 Electricity per week 75 Factory insurance per week 125 Other overhead per week 110 Total $ 710 Office expenses are very close to $781 per week. Of this amount, the breakdown seems to be: Salaries (including fringe benefits and payroll tax) $ 400 Rent of office 200 Depreciation of office equipment 81 Utilities 100 Tota 781 Direct labor is paid on a piece-rate (or piecework) basis. Workers are paid $1.25 per unit produced. Average rate of accounts receivable collections is as follows: During the month in which sale is made 30% 1st month after sale 40% 2nd month after sal 20% 3rd month after sale 10% 100%Several other notations by Bailey Edison a. Robert expected to draw $1,400 per month for personal use. b. Consulting fees will be billed at about $225 per week or $900 per month. c. A reasonable estimation of the value of factory and equipment is $70,000. Depreciation should be monthly on the basis of an average useful life of 5 years. This equipment will have a salvage value of $2,500. d. Darnell produces a single product, Darn Good, and the production process is fairly simple. Raw materials consist of a single item, which is usually entered into the process in the morning. Various machining operations take place during the day. At the end of each day, all the finished units are moved into the storeroom. Because started units are finished by the end of the day, there is never a work-in-process inventory overnight. e. Ignore taxes. f. The inventory of raw materials at the beginning of the coming year will be 800 units, and there will be 750 units of finished product. General guidelines set by Bailey Edison These guidelines should be followed through the year, at which time they are to be reviewed and revised. a. The estimates of variable costs of production are almost certainly correct. b. Fixed costs of production are almost certainly at $710 per week, except that there is no estimation or allowance for depreciation. Take fixed cost of production to equal $710 plus depreciation. c. Fixed amounts for overhead and fixed office expenses are listed at the per week amounts. To convert weekly fixed costs to monthly costs, multiply the weekly amount by 4 1/2. d. Establish cost accounting records on the basis of full cost, assuming that normal output is 500 units per week, or 2,250 units per month. Thus, budgeted full cost is $4.72. Note: this means that we assume that the dollar value of ending inventory for finished goods should be number of units valued at $4.72 per unit. e. Selling commission should be 10% on all sales, and the price on regular sales should be set at $7.00 for at least the first quarter of the year. f. All depreciation should be on straight-line basis.See Exhibit B for an estimation of the Balance Sheet as it will appear on January 1, when Robert Darnell takes complete control of the business. Exhibit B Darnell Manufacturing Company Balance Sheet For the Year Ended, December 31 (Beginning Balance, January 1) Assets Liabilities and Owners' Equity Cash $ 10,000.00 Accounts payable 1,275 Receivables 14,70 Notes payable 30,000 Raw material inventory 600 Total Liabilities 31,275 Finished goods inventory ($4.72 per unit) 3,540 Capital: Robert Darnell 85,687 Office equipment 3,122 Factory equipment 70,000 Total Liabilities and Land 5,000 Owners' Equity $ 116,962 Total Assets 116,962Required: 1. Sales Budget Alice's first important step in budgeting was to develop a sales budget and a schedule of expected cash collections. Actual sales for the prior October and November were available, and reasonable estimates of sales for December and the first four months of the coming year were made: Actual Sales (units) Expected Sales (units) October 1,500 November 2,300 December 1,800 January (of the coming year) 2,000 February (of the coming year) 2,200 March (of the coming year) 1,900 April (of the coming year 2,100 2. Production Budget The second step in budgeting was to develop a production budget and a raw materials schedule for the first quarter of the coming year. Since there was no established policy on production scheduling, inventory planning, or raw materials inventory, it was necessary to establish one. Edison, Robert, and Alice agreed that a policy based on experience would have to wait until some data were collected over the next 6 to 8 months. In an effort to "get things going," they settled on a two-part operational statement of policy a) Production in any month should be scheduled so that an ending inventory of Darn Good will equal one-half of the next month's expected sales. b) Purchase of raw material should be made so that on average there is enough raw material on hand to produce 700 Darn Goods. Thus, no end-of-month inventory should have fewer than 700 units of raw material. Prepare a production schedule, schedule of raw material use, and a schedule of raw material purchases for January, February and March. Finally, prepare a schedule of expected cash disbursements for raw materials. Raw materials are always purchased on a 30-day-due basis. Consequently, payments are always made in the month following the purchase of materials. It is expected that 1,700 units of materials will be purchase during the December prior to the coming year.3. Cost of Production Budget Alice's next task was to prepare a cost of production budget organized by variable and fixed costs. Included both cash and non-cash production costs and then summarize cash disbursements for direct labor and manufacturing overhead. Direct labor, all overhead commissions, salaries, rent, and utilities are paid in the month incurred. 4. Schedule of Cost of Goods Sold Once Alice had all the production costs she could create a schedule of cost of goods sold. Because the average production costs changed from month to month (based on change in units produce and fixed costs) Alice chose to value the ending inventory in finished goods at $4.72 each month. 5. Income Statements Having developed that data in assignments 1-4, Alice decided to prepare projected income statements for January, February and March. 6. Cash Budgets After developing the income statements, Alice decided to see what would happen to the cash position of Darnell during the quarter. When Mr. Darnell actually turns the business over to Robert, Mr. Darnell will withdraw all cash. All receivables will be due to Robert, and all payable will be his responsibility. Robert expects to pay $30,000 for the business, which will be a liability of the business, and he intends to deposit $10,000 in the firms' checking account to establish a working balance. (Both amounts are included on the Balance Sheet as of Jan. 1) 7. Balance Sheet As a final step in the general budget process, Alice decided to prepare a projected Balance Sheet as of the coming year's April 1. 8. Evaluation of the Budget Armed with the material developed in Items 1 through 5, Alice, Edison and Robert had a meeting to discuss problems that were likely to arise. What points would be likely to dominate such a meeting? Why?Sales Budget January February March Total Sales Unit 2,000 2,200 1,900 6,100 Selling Price 7 7 7 Sales Budget in Value 14,000 15,400 13,300 42,700 Sales Collection Sale month 30% 1st month after sale 40% 2nd month after sale 20% 3rd motnh after sale 10% Schedule of Expected Cash Collections January February March Total October Collection 1,050 1,050 November Collection 3,220 1,610 4,830 December Sale 5,040 2,520 1,260 8,820 January Sale 4,200 5,600 2,800 12,600 February Sale 4,620 6,160 10,780 March Sale 3,990 3,990 Total Cash Collections 13,510 14,350 14,210 42,070 Opening AR Balance Units Sales Opening AR October 1,500 10,500 10% 1,050 November 2,300 16,100 30% 4,830 December 1,800 12,600 70% 8,820