Question

(Forecasting net income​) In November of each​ year, the CFO of Barker Electronics begins the financial forecasting process to determine the​ firm's projected needs for new financing during the coming year. Barker is a small electronics manufacturing company located in​ Moline, Illinois, which is best known as the home of the John Deere Company. The CFO begins the process with the most recent​ year's income​ statement, projects sales growth for the coming​ year, and then estimates net income and finally the additional earnings he can expect to retain and reinvest in the firm. The​ firm's income statement for 2015​ follows:

Income Statement
	12/31/2015
Sales	$1,800,000
Cost of goods sold	$1,260,000
Gross profit	$540,000
Operating costs	$288,000
Depreciation expense	$50,000
Net operating profit	$202,000
Interest expense	$12,000
Earnings before taxes	$190,000
Taxes	$53,200
Net income	$136,800
Dividends	$28,000
Addition to retained earnings	$108,800

The electronics business has been growing rapidly over the past 18 months as the economy​ recovers, and the CFO estimates that sales will expand by 18 percent in the next year. In​ addition, he estimates the following relationships between each of the income statement expense items and​ sales:

​COGS/sales:		70​%
Operating​ expenses/sales:		16​%
Depreciation expense:	​	$50,000
Interest expense:	​	$12,000
Tax rate:		28%

Note that for the coming year both depreciation expense and interest expense are projected to remain the same as in 2015.

a. Estimate​ Barker's net income for 2016 and its addition to retained earnings under the assumption that the firm leaves its dividends paid at the 2015 level.

b. Reevaluate​ Barker's net income and addition to retained earnings if sales grow at 36 percent over the coming year.​ However, this scenario requires the addition of new plant and equipment in the amount of $110,000​, which increases annual depreciation to $58,000 per​ year, and interest expense rises to $16,000.

Answer 1

a]	Income Statement
		12/31/2015	12/31/2016
	Sales	$            18,00,000	$       21,24,000
	Cost of goods sold	$            12,60,000	$       14,86,800
	Gross profit	$              5,40,000	$         6,37,200
	Operating costs	$              2,88,000	$         3,39,840
	Depreciation expense	$                 50,000	$            50,000
	Net operating profit	$              2,02,000	$         2,89,840
	Interest expense	$                 12,000	$            12,000
	Earnings before taxes	$              1,90,000	$         2,77,840
	Taxes	$                 53,200	$            77,795
	Net income	$              1,36,800	$         2,00,045
	Dividends [20.46%]	$                 28,000	$            40,945
	Addition to retained earnings	$              1,08,800	$         1,59,100
b]		12/31/2015	12/31/2016
	Sales	$            18,00,000	$       24,48,000
	Cost of goods sold	$            12,60,000	$       17,13,600
	Gross profit	$              5,40,000	$         7,34,400
	Operating costs	$              2,88,000	$        3,91,680
	Depreciation expense	$                 50,000	$            58,000
	Net operating profit	$              2,02,000	$         3,33,680
	Interest expense	$                 12,000	$            16,000
	Earnings before taxes	$              1,90,000	$         3,17,680
	Taxes	$                 53,200	$            88,950
	Net income	$              1,36,800	$         2,28,730
	Dividends [20.46%]	$                 28,000	$            46,816
	Addition to retained earnings	$              1,08,800	$         1,81,914