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The CEO would like to see higher sales and a forecasted net income of $1,000,000. Assume that operating costs (excluding depreciation and amortization) are 55% of sales and that depreciation and amortization increase by 6% and interest expenses will increase by 5%. The tax rate, which is 40%, will remain the same. (Note that while the tax rate remains constant, the taxes paid will change.) What level of sales would generate $1,000,000 in net income? If necessary, round your answer to the nearest dollar at the end of the calculations.

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jepessoa

Answer:

The numbers are missing, so I looked for a similar question, but the ones I found had different numbers. I hope it can help you understand how to solve this one:

Hermann Industries is forecasting the following income statement:

  • sales $8,000,000
  • operating costs excluding depr & amort. 4,400,000
  • EBITDA $3,600,000
  • depreciation & amortization 800,000
  • EBIT 2,800,000
  • Interest 600,000
  • EBT 2,200,000
  • Taxes (40%) 880,000
  • Net income 1,320,000

The CEO would like to see higher sales and a forecasted net income of 2,500,000. Assume that operating costs (excluding depreciation and amortization) are 55% of sales and that depreciation and amortization and interest expenses will increase by 10%. the tax rate, which is 40%, will remain the same. what level of sales would generate 2,500,000 in net income?

We have to first calculate net income before taxes:

net income = net income before taxes x 60%

net income before taxes = $2,500,000 / 0.6 = $4,166,667

now, net income before taxes = EBIT - interests

$4,166,667 = EBIT - ($600,000 x 110%)

EBIT = $4,166,667 + $660,000 = $4,826,667

now it's EBITDA turn:

EBITDA = EBIT + depreciation and amortization

EBITDA = $4,826,667 + ($800,000 x 110%) = $5,706,667

finally:

total sales = EBITDA + operating costs excluding depr & amort., we can replace total sales by X

X = EBITDA + 0.55X

0.45X = $5,706,667

X = $5,706,667 / 0.45 = $12,681,482.22 ≈ $12,681,482

sales level that will result in a $2,500,000 net income = $12,681,482