Question 4 - Continued (b) Fred Ma is an accounting staff who is new to the company. Fred initiated the following conversation with Martin Li, sales manager, and Paul So, production manager. Fred: I am going to be involved with the preparation of the annual budget, I'd be interested to learn how the two of you estimate sales and production numbers. Martin: We will look at recent history, discuss what we know about the current accounts, potential customers, and the general state of consumer spending. Then, we add that usual dose of intuition to come up with the best forecast we can. I usually take the sales projections as the basis of my projections. We also have to make an estimate of what this year's ending inventories will be. But sometimes it is difficult because the numbers aren't always reliable because Martin makes some adjustments to the sales numbers before passing them on to me. Paul: Fred: What kind of adjustments? Martin: Paul: We don't want to fall short of the sales projections, so we generally give ourselves a little breathing room by lowing the initial sales projection from 5% to 10%. So, you know why this year's budget is not a very reliable at the starting point. We always have to adjust the projected production rates as the year progresses and, of course, we also change the ending inventory estimates as well. By the way, we make similar adjustments to expenses by adding at least 10% to the estimates; I think everyone around here does the same thing. Required: Explain why Paul and Martin behave in this manner and describe the benefits they are expected to realize and explain how their behavior adversely affect them