Question

hermann industries is forecasting the following income statement:sales $8,000,000operating costs excluding depr & amort. 4,400,000EBITDA $3,600,000depreciation & amortization 800,000EBIT 2,800,000Interest 600,000EBT 2,200,000Taxes (40%) 880,000Net income 1,320,000The CEO would like to see higher sales and a forecasted net income of 2,500,000. 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 2,500,000 in net income?

Answer 1

Based on revised assumptions, Hermann Industries will have to achieve sales revenue of $12,681,481 in order to generated target Net Income of $2,500,000

Step-by-step explanation:

Hermann Industries

Statement to calculate Revised Sales

Net Income $2,500,000

Add: Taxes (40%)

(Net Income × 40% ÷ 60%) $1,666,667

EBT $4,166,667

Add: Interest

($600,000 × (1+10%)) $660,000

EBIT $4,826,667

Depreciation & Amortization

($800,000 × (1+10%)) $880,000

EBITDA (45% of Sales) $5,706,667

Add: Operating Cost (55% of Sales)

(EBITDA × 55% ÷ 45%) $6,974,815

SALES $12,681,481

Revised Income Statement

Hermann Industries

Income Statement

Sales $12,681,481

Operating Costs $(6,974,815)

EBITDA $5,706,667

Depreciation & Amortization $(880,000)

EBIT $4,826,667

Interest $(660,000)

EBT $4,166,667

Taxes (40%) $(1,666,667)

Net Income $2,500,000

*Please note that figures in brackets represent negative figures.