Search this course mework INCOME STATEMENT Edmonds Industries is forecasting the

Question

Search this course mework INCOME STATEMENT Edmonds Industries is forecasting the following income statement: Sales Operating costs excluding depreciation & amortization 3,850,000 EBITDA Depreciation and amortization EBIT Interest $7,000,000 $3,150,000 700,000 $2,450,000 560,000 $1,890,000 756,000 $1,134,000 EBT Taxes (40%) Net income The CEO would like to see higher sales and a forecasted net income of $1,871,100. 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. (Note that while the tax rate remains constant, the taxes paid will change.) What level of sales would generate $1,871,100 in net income? It necessary round your answer to the nearest dollar at the end of the calculations.

Explanation / Answer

We make the income statement in reverse order starting with desired net income -

Add: Taxes @40% [ { ($1,871,000 / (1 - 40%) } x 40% ]

Now, if operating costs are 55% of sales, then EBITDA (the remaining portion after deducting operating costs from sales) should be 45% of sales.

Therefore, Required level of sales = $4,504,333.33333 / 45% = $10,009,629.6296 or $10,009,630

Desired Net Income $1,871,000

Add: Taxes @40% [ { ($1,871,000 / (1 - 40%) } x 40% ]

$1,247,333.33333 EBT $3,118,333.33333 Add: Interest (560,000 + 10%) $616,000 EBIT $3,734,333.33333 Add: Depreciation and amortization (700,000 + 10%) $770,000 EBITDA $4,504,333.33333

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