Tom used to run his own business, a small caf. Last year, due to water damage from a flash flood, not only did he lose a substantial part of his inventory; but his caf also sustained damages. In order to carry on the business, he sold the caf to his friend, Bill, who invested money to replace/repair damaged shop fixtures and machines, and to purchase new inventory. The small caf offers coffee and tea, and light food snacks bought from outside suppliers. The snacks are heated up in the caf and served. There is only one other worker, a waiter. Tom is now the manager. Between the two of them, they make drinks, serve customers, and clean up.

When he was running his own business, Tom did not receive a salary. Now he is paid $2,500 per month. The waiter is paid $1,000 a month. They both work from 9 am to 8 pm, six days a week. Tom is also in charge of purchasing for the caf. In the past, he bought inventory in bulk to get a lower price. However, as the inventory is perishable, it often spoils and at the end of each quarter about 30% is thrown away. This spoilage cost has been factored into the cost of ingredients per set. The caf sells drink & snacks in a set. The average ingredient costs for each set is $2.20 and it is sold at $4 per set. Rent and utilities average $2,500 per month. The business uses the number of sets as an allocation base for its overhead costs.

The budgeted sales for the next five quarters for the caf are stated below:

	No. of sets
Quarter 1 of 2018	11,200
Quarter 2 of 2018	12,400
Quarter 3 of 2018	22,600
Quarter 4 of 2018	25,800
Quarter 1 of 2019	14,400

Required:

(a) Apply normal costing and compute the product cost for a typical set (hint: fixed costs should be allocated using an appropriate predetermined overhead rate).

(b) If Tom is evaluated based on budgeted profit for the caf, explain how Bill should rate Toms performance for the first two quarters of 2018 if the actual sales for the caf are as follows (assume there are differences in the budgeted and actual costs per set of meal and selling price per set of meal).

	Actual no of sets
Quarter 1 of 2018	13,200
Quarter 2 of 2018	12,000

(c) The caf pays for purchases of ingredients one quarter later. All other expenses are paid for in cash in the same quarter. Assuming the caf has a cash balance of $28,400 and no outstanding ingredients payments at the beginning of 2018 from purchases in Quarter 4 of 2017, construct the cash budget for Quarter 2 and Quarter 3 of 2018.