[Jlove827]

Well, I have been given a problem by my professor to increase a company's net income. Below is the income statement that I have to use to increase the sales and net income.

Sales $8,000,000
Operating costs $4,400,000
(excluding depreciation &
Amortization)
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

Question:
The CEO would like to see higher sales and a forecasted net income of $2,500,000.

Assume that operating costs (excluding depreciation and amortizationare 55% of sales, and 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?

If someone can help me with this, I will be most grateful!

Thanks

Jlove827

[eao2005]

Hello. Believe it or not, I was looking for the answer to this exact question. I found it. Here's how I did it:


Sales 8,000,000 (5,706,667/1-.55 = 5,706,667/.45) 12,681,482
Op. Costs 4,400,000
EBITDA 3,600,000 (4,826,667 + 880,000 = EBITDA) 5,706,667
D & A 800,000 (800,000 x 10% = 80,000 + 800,000) 880,000
EBIT 2,800,000 (4,166,667 + 660,000 = EBIT) 4,826,667
Interest 600,000 (600,000 x 10% = 60,000 + 600,000) 660,000
EBT 2,200,000 (2,500,000/1-T = 2,500,000/.6 = EBT) 4,166,667
Taxes (40%) 880,000
Net Income 1,320,000 (given) 2,500,000


Work from the bottom up. First, find your Income before taxes (EBT) by dividing your NI by 1 minus the tax rate (1-T). Then find the new Interest and D&A amounts by adding 10% to the previous totals. Add upward to find each previous total. Finally, 55% of your EBITDA is your Oper. Costs. So, take out that 55% by dividing the EBITDA by (1-.55). This gives you the sales you would need. $12,681,482. Hope that makes sense. Good luck! (I just previewed the answer and it didn't keep my allignments. It's all bunched together. Sorry)

[idrisy]

How did you get 5,706,667 at the beginning?