Question

Hermann Industries is forecasting the following income statement:

Answer 1

Answer:

Sales: 5,530,000

Explanation:

"Assume that operating costs (excluding depreciation and amortization) are 55% of sales"

This means Contribution Margin Ratio = (1 - 55%) = 45%

Depreciation and amortization = 320,000 + Δ11% = 355,200

Intrest Expense = 280,000 + Δ11% = 310,800

Net income after tax 1,093,500

Income before-tax X (1 - tax rate) = income after-tax

1,093,500/(1- 0.40) = 1,822,500 before-tax

With the contribution from sales, we have to:

• pay the fixed cost
• pay the interest
• achieve 1,822,500 before tax to reach the after tax expected gain

$\frac{Fixed\:Cost + interest + target \: profit}{Contribution \:Margin \:Ratio} = Sales\: to\: Profit{dollars}$

(355,200+310,800+1,822,500)/0.45 =

2,488,500/.45 = 5,530,000

Answer 2

Answer:

5,530,000

Explanation:

Hermann Industries is forecasting the following income statement:

Sales $4,000,000

Operating costs excluding depreciation & amortization 2,200,000

EBITDA $1,800,000

Depreciation and amortization 320,000

EBIT $1,480,000 Interest 280,000

EBT $1,200,000

Taxes (40%) 480,000

Net income $720,000

The CEO would like to see higher sales and a forecasted net income of $1,093,500.

Assuming, operating costs (excluding depreciation and amortization) are 55% of sales and that depreciation and amortization and interest expenses will increase by 11%. The tax rate, which is 40%, will remain the same.

(Note that while the tax rate remains constant, the taxes paid will change.)

2,488,500/.45 = 5,530,000

Therefore, 5,530,000 is the level of sales that would generate $1,093,500 in net income.