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 980,000 EBIT $2,170,000 Interest 420,000 EBT $1,750,000 Taxes (25%) 437,500 Net income $1,312,500 The CEO would like to see higher sales and a forecasted net income of $2,490,000. Assume that operating costs (excluding depreciation and amortization) are 55% of sales and that depreciation and amortization and interest expenses will increase by 6%. The tax rate, which is 25%, will remain the same. (Note that while the tax rate remains constant, the taxes paid will change.) What level of sales would generate $2,490,000 in net income? Round your answer to the nearest dollar, if necessary.

Answer 1

Inorder to acheive the Net income of $ 24,90,000, The forecasted sales must be $1,06,75,556, under the given set of constrains in the question.

Particulars	Amount
Sales	1,06,75,556
Operating Cost excluding Depreciation and Amortisation	58,71,556
EBITDA	48,04,000
Depreciation and amortization	10,38,800
EBIT	37,65,200
Interest	4,45,200
EBT	33,20,000
Taxes	8,30,000
Net income	24,90,000

For making the calculation we must start from required Net income and reverse working to acheive the sales target.

Working Notes

1. Calculation of EBT : Net Income = EBT - [EBT x Tax Rate]

= EBT -[EBT x0.25]

EBT = Net Income / 0.75 ; 2490000/0.75 =33,20,000

2. Taxes = 25% of EBT

= 33,20,000 x0.25 = 8,30,000

3. Interest will Increasw at 6% from existing

  Interest =1.06 x 420000 = 445200

4. Depreciation and Amortisation = 1.06 x 980,000 = 10,38,800

5. EBITDA =  EBIT + Depreciation and amortization

=3765200 +1038800 = 4804000

6.Calculation of Sales

(Sales - Operating expense ) =EBITDA

Operating expense = 55 % of Sales , Substituting

We get , [Sales -0.55 Sales] = EBITDA

Sales = EBITDA / 0.45

Sales = 4804000 /0.45 =10675555.55

7. Operating Expense = 55% of Sales =5871555.55