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:

1. You have no budget or control system in place.
2. Jimmy Mach's decision rules are all wrong.
3. 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 Edison

Robert 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 that 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.

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Exhibit A Variable Direct Costs Direct materials cost per unit Direct labor costs per unit Total Variable Overhead Indirect labor cost per unit Electricity cost per unit Other overhead cost per unit produced Total Fixed Costs Indirect labor per week $ 0.75 1.25 $ 2.00 $ 0.20 0.10 0.50 $ 0.80 Indirect material per week Electricity per week Factory insurance per week Other overhead per week Total $ 100 300 75 125 110 $ 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) $ Rent of office Depreciation of office equipment Utilities Total 400 200 81 100 $ 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 1st month after sale 2nd month after sale 3rd month after sale 30% 40% 20% 10% 100% Exhibit A Variable Direct Costs Direct materials cost per unit Direct labor costs per unit Total Variable Overhead Indirect labor cost per unit Electricity cost per unit Other overhead cost per unit produced Total Fixed Costs Indirect labor per week $ 0.75 1.25 $ 2.00 $ 0.20 0.10 0.50 $ 0.80 Indirect material per week Electricity per week Factory insurance per week Other overhead per week Total $ 100 300 75 125 110 $ 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) $ Rent of office Depreciation of office equipment Utilities Total 400 200 81 100 $ 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 1st month after sale 2nd month after sale 3rd month after sale 30% 40% 20% 10% 100%