Hermann Industries is forecasting the following income statement: The CEO would
ID: 2969602 • Letter: H
Question
Hermann Industries is forecasting the following income statement:
The CEO would like to see higher sales and a forecasted net income of $1,346,400. Assume that operating costs (excluding depreciation and amortization) are 55% of sales and that depreciation and amortization and interest expenses will increase by 10%. The tax rate, which is 40%, will remain the same. What level of sales would generate $1,346,400 in net income? If necessary, round your answer to the nearest dollar at the end of the calculations.
Sales $6,000,000 Operating costs excluding depreciation & amortization 3,300,000 EBITDA $2,700,000 Depreciation and amortization 900,000 EBIT $1,800,000 Interest 480,000 EBT $1,320,000 Taxes (40%) 528,000 Net income $792,000Explanation / Answer
Net income = 1,346,400
As taxes are 40%, EBT = net income/(1-40%) = 1,346,400/(1-40%) = 2,244,000 and taxes =40%*EBT = 40%*2,244,000 =897,600
Interest = 480,000*(1+10%) = 528,000
So EBIT = EBT+interest = 2,244,000 + 528,000 = 2,772,000
Depreciation and amortization = old figure *(1+10%) = 900,000*(1+10%) = 990,000
EBITDA = EBIT + Depreciation and amortization = 2,772,000 + 990,000 = 3,762,000
As operating costs are 55% of sales, then EBITDA = 1-55% = 45% of sales
i.e. sales = EBITDA/45% = 3,762,000/45% = 8,360,000
Operating costs=55%*sales = 55%*8,360,000 = 4,598,000
I hope this detailed working helped you understand all the intermediate steps. Answer is sales=8,360,000
Below is the final income statement with the calculated figures.
Hope this helped ! Let me know in case of any queries.
Sales 8,360,000 Operating costs excluding depreciation & amortization 4,598,000 EBITDA 3,762,000 Depreciation and amortization 990,000 EBIT 2,772,000 Interest 528,000 EBT 2,244,000 Taxes (40%) 897,600 Net income 1,346,400