Question

Tony Inc. has forecast the following numbers for this upcoming year: Sales $500,000 Cost of Goods Sold 300,000 Interest Expense 100,000 Net Income 60,000 The company is in the 40 percent tax bracket. Its cost of goods sold always represents 60 percent of its sales. That is, if the company’s sales were to increase to $1 million, its cost of goods sold would increase to $600,000. The company’s CEO is unhappy with the forecast and wants the firm to achieve a net income equal to $120,000. Assume that Tony’s interest expense remains constant. In order to achieve this level of net income, what level of sales will the company have to achieve? (The company doesn’t pay any preferred dividend and have zero depreciation)

Answer 1

Sales= $750,000

Step-by-step explanation:

Giving the following information:

Sales $500,000

Cost of Goods Sold 300,000

Gross profit= 200,000

Interest Expense 100,000

EBT= 100,000

Tax= 40,000

Net income= 60,000

The company’s CEO is unhappy with the forecast and wants the firm to achieve a net income equal to $120,000.

Gross profit= [Net income/(1-t)] + Interest

Gross profit= 200,000 + 100,000= 300,000

Sales= gross profit/0.40= 750,000

Sales= 750,000

COGS= 450,000

Gross profit= 300,000

Interest= 100,000

EBT= 200,000

Tax= 80,000

Net profit= 120,000