Question

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 1,260,000 EBIT $2,790,000 Interest 900,000 EBT $1,890,000 Taxes (40%) 756,000 Net income $1,134,000 The CEO would like to see higher sales and a forecasted net income of $1,814,400. Assume that operating costs (excluding depreciation and amortization) are 55% of sales and that depreciation and amortization and interest expenses will increase by 13%. 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 $1,814,400 in net income? If necessary, round your answer to the nearest dollar at the end of the calculations.

Answer 1

Required Sales will be calculated through back calculation as follows:

Required Net Income = $1,814,400

Add: Taxes @ 40% = (1,814,400/60%)*40% = $1,209,600

EBT = $3,024,000

Add: Interest Charges 900,000*113% = $1,017,000

EBIT = $4,041,000

Add: Depreciation and Amortization = 1,260,000*113% = $1,423,800

EBITDA = $5,464,800

Add: Operating Costs = (5,464,800/45%)*55% = $6,679,200

Sales = $12,144,000

Hence, required sales to generate $1,814,400 in net income = $12,144,000