Question

INCOME STATEMENT

Edmonds Industries is forecasting the following income statement:

Sales	$9,000,000
Operating costs excluding depreciation & amortization	4,950,000
EBITDA	$4,050,000
Depreciation and amortization	900,000
EBIT	$3,150,000
Interest	720,000
EBT	$2,430,000
Taxes (40%)	972,000
Net income	$1,458,000

The CEO would like to see higher sales and a forecasted net income of $2,551,500. Assume that operating costs (excluding depreciation and amortization) are 55% of sales and that depreciation and amortization and interest expenses will increase by 15%. 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 $2,551,500 in net income? If necessary, round your answer to the nearest dollar at the end of the calculations.

Answer 1

EBITDA = Sales - operating costs (excluding depreciation and amortization)

If operating costs (excluding depreciation and amortization) are 55% of sales and sales is 100%, then EBITDA is 45% of sales.

We need to do a little bit of back calculation -

Net Income	$2,551,500
Add: Tax [ ( $2,551,500 / 60% ) x 40% ]	$1,701,000
EBT	$4,252,500
Add: Interest [ $720,000 + 15% ]	$828,000
EBIT	$5,080,500
Add: Depreciation and Amortization [ $900,000 + 15% ]	$1,035,000
EBITDA	$6,155,500

Now, this EBITDA is 45% of the required sales.

Therefore, required sales = $6,155,500 / 45% = $13,590,000

Note: You can check your answer using proper calculation and see if this sales gives the required net income of $2,551,500.