Comprehensive Operating Budget. Shell Environmental Systems, Inc. distrib- utes portable air purification and drinking water treatment systems. Casey Heydari, controller, is in the process of budgeting operations by quarter for the upcoming year of 1998. The air purifier unit sells for $500, and sales volume is expected to grow by 5 percent quarterly over the next two years. A water treatment unit sells for $200, and sales volume will grow by 3 percent quarterly for the next 18 months. Selling expenses are budgeted at 20 percent of total sales dollars plus advertising ex- penses of $40,000 per quarter. General and administrative expenses are approximately 3 percent of sales plus $50,000 per quarter. The income tax rate is 40 percent.

Purchase costs are $275 per unit for an air purifier and $130 per unit for a water treatment system. The company sold, during the fourth quarter of 1997, 1,000 air purifiers and 2,000 water treatment units. The ending inventory for 1997 was 50 percent of forecast sales for the first quarter of 1998 and should remain at that same percentage. The forecast unit costs for 1998 are the same as those experienced in 1997.

Required 1. Assist Casey in the budget review process by preparing spreadsheet schedules to show forecast 1998 net income by quarter and in total. (Round sales units to nearest whole unit.)

2. Comment on each of the following changes to the 1998 forecast:

(a) Sales growth rates of only 2 percent per quarter for both products.

(b) Per unit product costs of $295 for air purifiers and $110 for water treat- ment systems.

(c) Selling expenses cost function of 10 percent of sales plus $100,000 per quarter.