Question

You have been given the following information for PattyCake’s Athletic Wear Corp. for the year 2018: Net sales = $39,100,000. Cost of goods sold = $22,260,000. Other operating expenses = $6,800,000. Addition to retained earnings = $1,214,500. Dividends paid to preferred and common stockholders = $1,953,000. Interest expense = $1,870,000. The firm’s tax rate is 30 percent. In 2019: Net sales are expected to increase by $10.10 million. Cost of goods sold is expected to be 60 percent of net sales. Depreciation and other operating expenses are expected to be the same as in 2018. Interest expense is expected to be $2,145,000. The tax rate is expected to be 30 percent of EBT. Dividends paid to preferred and common stockholders will not change. Calculate the addition to retained earnings expected in 2019.

Answer 1

2018:

Gross profit = Net sales - Cost of goods sold
Gross profit = $39,100,000 - $22,260,000
Gross profit = $16,840,000

Earnings after tax = Additions to retained earnings + Dividends paid to preferred and common stockholders
Earnings after tax = $1,214,500 + $1,953,000
Earnings after tax = $3,167,500

Pre-tax income = Earnings after tax / (1 - tax rate)
Pre-tax income = $3,167,500 / (1 - 0.30)
Pre-tax income = $4,525,000

Operating income = Pre-tax income + Interest expense
Operating income = $4,525,000 + $1,870,000
Operating income = $6,395,000

Depreciation = Gross profit - Other operating expenses - Operating income
Depreciation = $16,840,000 - $6,800,000 - $6,395,000
Depreciation = $3,645,000

2019:

Net sales = $39,100,000 + $10,100,000
Net sales = $49,200,000

Cost of goods sold = 60% * Net sales
Cost of goods sold = 60% * $49,200,000
Cost of goods sold = $29,520,000