Question

Listed below is the 2018 income statement for Tom and Sue Travels, Inc.

TOM AND SUE TRAVELS, INC.
Income Statement for Year Ending December 31, 2018
(in millions of dollars)
Net sales	$	17.200
Less: Cost of goods sold		7.800
Gross profits	$	9.400
Less: Other operating expenses		3.550
Earnings before interest, taxes, depreciation, and amortization (EBITDA)	$	5.850
Less: Depreciation		2.600
Earnings before interest and taxes (EBIT)	$	3.250
Less: Interest		0.780
Earnings before taxes (EBT)	$	2.470
Less: Taxes		0.655
Net income	$	1.815

The CEO of Tom and Sue’s wants the company to earn a net income of $2.660 million in 2019. Cost of goods sold is expected to be 60 percent of net sales, depreciation and other operating expenses are not expected to change, interest expense is expected to increase to $0.880 million, and the firm’s tax rate will be 30 percent.

Calculate the net sales needed to produce net income of $2.660 million. (Enter your answer in millions of dollars rounded to 3 decimal places.)

Answer 1

Step 1. EBT (1-t) = Net income

EBT (1 - 0.3) = $2.660M

EBT = $2.660M / (1 - 0.3) = $3.800M.

Step 2. EBIT = EBT + Interest = $3.800M. + $0.880M. = $4.680M

Step 3. EBITDA = EBIT + Depreciation = $4.680M + $2.600M = $7.280M

Step 4. Gross profits = EBITDA+ Other operating expenses

= $7.280M. + $3.550M. = $10.830M

Step 5. Net sales = Gross profits / (1 - Cost of goods sold percent)

= $10.830M / (1 - 0.6) = $27.075M.

Step 6. Cost of goods sold = Net sales - Gross profits

= $27.075M - $10.830M = $16.245M

TOM AND SUE TRAVELS, INC.
Income Statement for Year Ending December 31, 2018
(in millions of dollars)
Net sales (Step 5)	$	27.075
Less: Cost of goods sold (Step 6)		16.245
Gross profits (Step 4)	$	10.830
Less: Other operating expenses		3.550
Earnings before interest, taxes, depreciation, and amortization (EBITDA) (Step 3)	$	7.280
Less: Depreciation		2.600
Earnings before interest and taxes (EBIT) (Step 2)	$	4.680
Less: Interest		0.880
Earnings before taxes (EBT) (Step 1)	$	3.800
Less: Taxes		1.140
Net income	$	2.660