Question

Income Statement Hermann Industries is forecasting the following income statement: Sales $10,000,000 Operating costs excluding depreciation & amortization 5,500,000 EBITDA $4,500,000 Depreciation and amortization 1,200,000 EBIT $3,300,000 Interest 900,000 EBT $2,400,000 Taxes (40%) 960,000 Net income $1,440,000 The CEO would like to see higher sales and a forecasted net income of $1,728,000. Assume that operating costs (excluding depreciation and amortization) are 55% of sales and that depreciation and amortization and interest expenses will increase by 9%. The tax rate, which is 40%, will remain the same. What level of sales would generate $1,728,000 in net income? If necessary, round your answer to the nearest dollar at the end of the calculations.

Answer 1

According to the given problem,

Net income = $1,728,000

But we know that,

Net income = EBT - Tax

$1,728,000 = EBT - (0.4* EBT)

$1,728,000 = EBT (1 - 0.4)

$1,728,000 = 0.6 * EBT

EBT = $1,728,000 / 0.6

= $2,880,000

Therefore, the value of EBT is $2,880,000

EBIT = EBT + Interest

But there is a 9% increase in the interest expense.

New interest expense = 9% ($900,000) + $900,000

=$81,000 + $900,000

= $981,000

EBIT = $2,880,000 + $981,000

=$3,861,000

EBITDA = EBIT + Depreciation and Amortization

Also Depreciation and Amortization will increase by 9%

Depreciation and Amortization = 9% ($1,200,000) +$1,200,000

= $108,000 + $1,200,000

= $1,308,000

Substituting the values of Depreciation and Amortization inthe above equation, we get

EBITDA = $3,861,000 + $1,308,000

= $5,169,000

We know that

EBITDA = SAles - OPeratingexpenses

$5,169,000 = Sales - (0.55 * Sales) {Since Operating expensesare 55% of sales}

$5,169,000 = SAles (1 - 0.55)

$5,169,000 = Sales (0.45)

Sales = $5,169,000 / 0.45

=$11,486,667

Therefore, the new sales will be $11,486,667