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Edmonds Industries is forecasting the following income statement: Sales $7,000,000 Operating costs excluding depreciation & amortization...

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 350,000

EBIT $2,800,000

Interest 350,000

EBT $2,450,000

Taxes (40%) 980,000

Net income $1,470,000

The CEO would like to see higher sales and a forecasted net income of $1,837,500. Assume that operating costs (excluding depreciation and amortization) are 55% of sales and that depreciation and amortization and interest expenses will increase by 8%. The tax rate, which is 40%, will remain the same. (Note that while the tax rate remains constant, the taxes paid will change.) What level of sales would generate $1,837,500 in net income? If necessary, round your answer to the nearest dollar at the end of the calculations.

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Expert Solution

We will make reverse making for calculation purpose:

Earning before tax =Net income /(1-Tax rate)

                         = 1837500/(1-.40)

                         = 3062500

Interest : 350000(1+.08)= 378000

EBIT =EBT + interest

           = 3062500+378000

           = 3440500

Depreciation and amortization = 350000(1+.08)=378000

EBITDA = 3440500+378000

                = 3818500

level of sales would generate $1,837,500 in net income = EBITDA/(1-variable cost ratio)

                         =3818500/(1-.55)

                        = 3818500/.45

                          = $ 8,485,556

jeff jeffy answered 1 year ago
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