Question

Garfield Industries is expanding its operations throughout the Southeast United States. Garfield anticipates that the expansion will increase sales by $1,000,000, and increase the costs of goods sold by $700,000. Depreciation expenses will rise by $50,000 and interest expense will increase by $150,000. The company’s tax rate will remain at 40 percent. If the company’s forecast is correct, how much will net income increase or decrease, as a result of the expansion?

Answer 1

Answer:

$60,000 increase

Explanation:

The company's additional earnings before interest and taxes (EBIT) are subjected to a 40% tax rate. The company's EBIT is:

$EBIT = Sales - Cost+Depreciation\\EBIT = 1,000,000-700,000+50,000\\EBIT =\ 350,000$

The change in income is determined as the EBIT minus taxes and interest expense:

$I = \ 350,000*(1-0.4) -\ 150,000\\I=\ 60,000$

Therefore, Garfield Industries experienced a $60,000 increase in its income  as a result of the expansion.