Question

Meadow Industries is forecasting the following income statement:

Sales	$15,500,000
Operating costs excluding      depreciation	7,750,000
EBITDA	$ 7,750,000
Depreciation	1,000,000
EBIT	$ 6,750,000
Interest	2,500,000
EBT	$ 4,250,000
Taxes (30%)	1,275,000
Net income	$ 2,975,000

The CEO would like to see higher sales and a forecasted net income of $7,000,000. Assume that operating costs (excluding depreciation) are 50% of sales and that depreciation and interest expenses will increase by 20%. The tax rate will remain at 30%. What level of sales would generate $7,000,000 in net income?

	a.	$28,400,000
	b.	$20,225,000
	c.	$19,525,000
	d.	$23,870,899
	e.	$32,000,000

Answer 1

Sales(balance)(100%)(14,200,000/0.5)	28,400,000
Operating costs excluding depreciation(50%)(28,400,000*50%)	14,200,000
EBITDA(50%)(13,000,000+1,200,000)	14,200,000
Depreciation(1,000,000*1.2)	1,200,000
EBIT(10,000,000+3,000,000)	13,000,000
Interest(2,500,000*1.2)	3,000,000
EBT(100%)(7,000,000/0.7)	10,000,000
Less:tax@30%(10,000,000*30%)	3,000,000
Net income(70%)	7,000,000