Income Statement: Herman Industries isforecasting the following income statement
ID: 2705514 • Letter: I
Question
Income Statement: Herman Industries isforecasting the following income statement:
Sales $8,000,000
Operating costs excluding depr. & amort. 4,400,00
EBITDA $3,600,000
Depreciation &amortization 800,000
EBIT $2,800,000
Interest 600,000
EBT $2,200,000
Taxes($40%) 880,000
Net income $1,320,000
The CEO would like to see higher sales and a forecasted netincome of $2,500,000. Assume that operating costs (excludingdepreciation and amortization) are 55% of sales and thatdepreciation and amortization and interest expenses will increaseby 10%. The tax rate, which is 40%, will remain thesame. What level of sales would generate $2,500,000 in netincome?
Explanation / Answer
NCOMESTATEMENT
Sales ($5,706,667 / 1-0.55)
$12,681,482
Less: Operating Cost excluding dip & amortization ($12,681,482 *0.55)
($6,974,815)
EBITDA ($4,826,667 + $880,000)
$5,706,667
Depreciation & Amortization ($800,000 * 0.10 +$80,000)
($880,000)
EBIT ($4,166,667 + $660,000)
$4,826,667
Interest expenses ($600,000 * 0.10 + $600,000)
($660,000)
EBT ($2,500,000 / 1-0.40)
$4,166,667
Less: Tax ($4,166,667* 0.40)
($1,666,667)
Net Income
$2,500,000
NCOMESTATEMENT
Sales ($5,706,667 / 1-0.55)
$12,681,482
Less: Operating Cost excluding dip & amortization ($12,681,482 *0.55)
($6,974,815)
EBITDA ($4,826,667 + $880,000)
$5,706,667
Depreciation & Amortization ($800,000 * 0.10 +$80,000)
($880,000)
EBIT ($4,166,667 + $660,000)
$4,826,667
Interest expenses ($600,000 * 0.10 + $600,000)
($660,000)
EBT ($2,500,000 / 1-0.40)
$4,166,667
Less: Tax ($4,166,667* 0.40)
($1,666,667)
Net Income
$2,500,000