Question

At the end of last year, Roberts Inc. reported the following income statement (in millions of dollars):

Sales: $3 billion
Looking ahead to the following year, the company’s CFO has assembled this information:

Year-end sales are expected to be 10% higher than the $3 billion in sales generated last year.
Year-end operating costs, excluding depreciation, are expected to equal 80% of year-end sales.
Depreciation is expected to increase at the same rate as sales.
Interest costs are expected to remain unchanged.
The tax rate is expected to remain at 40%.
On the basis of that information, what will be the forecast for Roberts’ year-end net income?

a) $330 million
b) $297 million
c) $270 million
d) $243 million

Answer 1

To calculate the forecast for Roberts' year-end net income, we need to determine the year-end sales, operating costs, and depreciation. Based on the information given, the net income forecast would be less than $330 million and more than $243 million.

Step-by-step explanation:

To calculate the forecast for Roberts' year-end net income, we need to first determine the year-end sales, operating costs, and depreciation. Based on the information given:

1. Year-end sales are expected to be 10% higher than the $3 billion in sales generated last year. Therefore, year-end sales would be $3 billion + ($3 billion * 10%) = $3 billion + $300 million = $3.3 billion.
2. Year-end operating costs, excluding depreciation, are expected to equal 80% of year-end sales. Therefore, operating costs would be $3.3 billion * 80% = $2.64 billion.
3. Depreciation is expected to increase at the same rate as sales, which means it would also be 10% higher than last year. Let's assume last year's depreciation was D million dollars, then this year's depreciation would be D + (D * 10%) = D + 0.1D = 1.1D million dollars.

With this information, we can calculate the forecast for Roberts' year-end net income using the formula:

Net Income = (Sales - Operating Costs - Depreciation) * (1 - Tax Rate)

Plugging in the values, we get:

Net Income = ($3.3 billion - $2.64 billion - 1.1D million dollars) * (1 - 40%)

Since we don't have the information about the actual depreciation amount, we can't calculate the exact net income forecast. Therefore, we cannot determine the specific answer choices provided. However, we can say that the net income forecast would be less than $330 million (option a) and more than $243 million (option d).