Determine net income when interest expense, tax rate given

Question

Swann Systems containing forecast such income statement to upcoming year:

Sales                                                                            $          5,000,000

Operating costs (excluding depr and amort)                            3,000,000

EBITDA                                                                        $            2,000,000

Depreciation and amortization                                                  500,000

EBIT                                                                             $          1,500,000

Interest                                                                                    500,000

EBT                                                                              $          1,000,000

Taxes (40 percent)                                                                   400,000

Net income                                                                 $            600,000

The president of company is unsatisfied along with the forecast and wants to notice higher sales as well as a forecasted net income as of $2,000,000.

Suppose that operating costs are always 60 percent of sales, and which depreciation and interest expense, amortization and the company's tax rate (40 percent), will keep the same even though sales change. How much into sales would Swann have to acquire to generate $2,000,000 within net income?

Answer 1

Working up the income statement you calculate the new sales level should be $10,833,333.

Sales                                                  $  10,833,333                            $4,333,333/(1 - 0.6)

Operating costs   

(excl. depr. and amort.)(60percent)              6,500,000                            $10,833,333 × 0.6

EBITDA                                                $  4,333,333                             $3,833,333 + $500,000

Depreciation and amortization                      500,000 

EBIT                                                    $  3,833,333                             $3,333,333 + $500,000

Interest                                                    500,000 

EBT                                                     $   3,333,333                             $2,000,000/0.6

Taxes (40 percent)                                     1,333,333 

Net income                                           $    2,000,000