Question

The company's president is disappointed with the forecast 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 percent of sales. Also, assume that depreciation, interest expense, and the company's tax rate, which is 40 percent, will remain the same even if sales change. What level of sales would Swann have to obtain to generate $2,000,000 in net income?

Answer 1

Answer:

$2,000,000

Explanation:

The calculation of net income is shown below:-

Forecasted net income = $2,000,000

Tax = $2,000,000 ÷ 0.6 × 0.4

= $1,333,333.33

EBIT = Forecasted net income + Tax

= $2,000,000 + $1,333,333.33

= $3,333,333.33

Depreciation = $500,000

Gross Margin = $3,333,333.33 + $500,000

= $4,333,333.33

Operating cost = $6,500,000

Sales = Gross margin + Operating cost

= $4,333,333.33 + $6,500,000

= $10,833,333.33

At sales $10,833,333.33 Net Income would be $2,000,000