Question

eBook Problem Walk-Through

Edmonds Industries is forecasting the following income statement:

Sales	$12,000,000
Operating costs excluding depreciation & amortization	6,600,000
EBITDA	$5,400,000
Depreciation and amortization	1,320,000
EBIT	$4,080,000
Interest	1,200,000
EBT	$2,880,000
Taxes (25%)	720,000
Net income	$2,160,000

The CEO would like to see higher sales and a forecasted net income of $3,670,000. 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 25%, will remain the same. (Note that while the tax rate remains constant, the taxes paid will change.) What level of sales would generate $3,670,000 in net income? Round your answer to the nearest dollar, if necessary.

$  

Answer 1

Net Income = EBT - Taxes on EBT

3670000 = ( 1 - 0.25 ) EBT

EBT = 3670000 / 0.75 = 4,893,333.33

EBT = EBIT - Interest

4893333.33 = EBIT + ( 1200000 + 10% *1200000)

EBIT = 4893333.33 + 1320000 = 6213333.33

EBIT = EBITDA - Depreciation and amortization

6213333.33 = EBITDA - 1320000 *1.10

EBITDA = 7665333.33

It is given that operating costs (excluding depreciation and amortization) are 55% of sales.

EBITDA = Sales - 55% of Sales = 45% of Sales

Sales = EBITDA / 0.45

Sales = 7665333.33 / 0.45 = $17,034,074.10