swann systems is forecasting the following income statement for the upcoming yea
ID: 2701456 • Letter: S
Question
swann systems is forecasting the following income statement for the upcoming year:
sales $5,000,000
operating costs(excluding depreciation) 3,000,000
gross margin $2,000,000
depreciation 500,000
EBIT $1,500,000
interest 500,000
EBT $1,000,000
taxes (40%) 400,000
net income $ 600,000
the company's president is disappointed with the forcast and would like to see swann generate higher sales and a forecasted net income of $2,000,000.
assume that operating costs (excluding depreciation) are always 60% of sales. also assume that depreciation, interest expense, and the company's tax rate which is 40% will remain the same even if sales change. what level of sales would swann have o obtain to generate $2,000,000 in net income?
A. $10,833,333
B. $9,800,000
C. $18,300,000
D. $17,200,000
Explanation / Answer
For net income to be 2,000,000, then EBT should be 2,000,000/(1-40%) = 3,333,333
Interest + depreciation = 500,000+500,000 = 1,000,000
So gross margin = EBT + interest + depreciation = 3,333,333.33+1,000,000 = 4,333,333
Gross margin = sales *(1-60%) = sales *40% = 4,333,333
So sales = $10,833,333 (Choice A)
Hope this helped ! Let me know in case of any queries.
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