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 1,050,000 EBIT $2,100,000 Interest 700,000 EBT $1,400,000 Taxes (25%) 350,000 Net income $1,050,000 The CEO would like to see higher sales and a forecasted net income of $1,320,000. Assume that operating costs (excluding depreciation and amortization) are 55% of sales and that depreciation and amortization and interest expenses will increase by 15%. 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 $1,320,000 in net income? Round your answer to the nearest dollar, if necessary. $

Answer 1

Answer:

Forecasted Net Income = $1,320,000
Income Tax rate = 25%
Forecasted EBT = $1,320,000 / (1 – 0.25)
Forecasted EBT = $1,760,000

Forecasted Interest Expense = $700,000 * 1.15
Forecasted Interest Expense = $805,000

Forecasted EBIT = Forecasted EBT + Forecasted Interest Expense
Forecasted EBIT = $1,760,000 + $805,000
Forecasted EBIT = $2,565,000

Forecasted Depreciation and Amortization = $1,050,000 * 1.15
Forecasted Depreciation and Amortization = $1,207,500

Forecasted EBITDA = Forecasted EBIT + Forecasted Depreciation and Amortization
Forecasted EBITDA = $2,565,000 + $1,207,500
Forecasted EBITDA = $3,772,500

Operating Costs (excluding Depreciation and Amortization) = 55%
Therefore, EBITDA = 45% of Sales
Forecasted EBITDA = $3,772,500
$3,772,500 = 45% * Sales
Forecasted Sales = $8,383,333

Therefore, a level of Sales of $8,383,333 would be required to generate net income of $1,320,000.