Question

Edmonds Industries is forecasting the following income statement:

Sales	$7,000,000
Operating costs excluding depreciation & amortization	3,850,000
EBITDA	$3,150,000
Depreciation and amortization	420,000
EBIT	$2,730,000
Interest	420,000
EBT	$2,310,000
Taxes (40%)	924,000
Net income	$1,386,000

The CEO would like to see higher sales and a forecasted net income of $2,079,000. Assume that operating costs (excluding depreciation and amortization) are 55% of sales and that depreciation and amortization and interest expenses will increase by 14%. 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 $2,079,000 in net income? Round your answer to the nearest dollar, if necessary.

Answer 1

Sales = x million dollars

Operating Costs = 0.55*x (in millions of dollars)

EBITDA = (Sales) - (Operating Costs)

= 0.45x (in millions of dollars)

DA = (old DA) + 14% of (old DA)

= $0.42 million x (1.14) = $0.4788 million

EBIT = (EBITDA) - (DA)

= 0.45x - 0.4788

Interest = (old interest) + (14% of old interest)

= $0.42 million x (1.14) = $0.4788 million

EBT = EBIT - Interest

= 0.45x - 0.4788 - 0.4788 = 0.45x - 0.9576

Net Income = EBT - Taxes

= (0.45x - 0.9576) - [0.40 x (0.45x - 0.9576)]

= 0.45x - 0.9576 - 0.18x + 0.38304 = 0.27x - 0.57456

Desired Net Income = $2.079 million

0.27x - 0.57456 = 2.079

0.27x = 2.65356

x = 9.828, or $9,828,000