Question

Mr. Burns wants a net income of $3 million next year for the Springfield Nuclear Plant. Their cost of goods sold run 18% of sales and they have $5 million in other operating expenses plus $2.6 million in depreciation. If they have interest expense of $1.5 million and their tax rate is 40%, what revenue level will be necessary to reach his goal? A. $50,555,556 B. $64,444,444 C. $20,243,902 D. $17,195,122

Answer 1

The correct answer is D. $ 17,195,122

Note 1:

Net Income = 60% of the net Income before taxes

Hence, $ 3 Million = 60% of net Income before taxes

Hence, net Income before taxes = $ 3 Million /60%

= $ 5 Million

Now, Gross Profit = net Income before taxes + Operating expenses + Depreciation+ Interest Expense

= $ 5 Million + $ 5 Million + $ 2.6 Million +$ 1.5 Million

= $14.10 Million

Now, Since the Cost of Goods sold is 18% of Sales, this means gross profit is 82% of Sales.

Hence, Revenue = Gross Profit / 82%

= $ 14.10 Million /82%

= $ 17,195,122 Million

Note 2:

This can be verified as under:

Sales	17,195,122
Less Cost of Goods Sold (18% * Sales)	3,095,121.95
Gross Profit	14,100,000
Less: Interest Expense	1,500,000
Less: Depreciation	2,600,000
Less : Operating Cost	5,000,000
Income Before Taxes	5,000,000
Less : Tax (40% * Income Before Taxes)	2,000,000
Net Income	3,000,000