Dillard Industries is expanding its operations throughout the Southeast United States. Dillard anticipates that the expansion will increase sales by $1,000,000 and increase operating costs (excluding depreciation and amortization) by $700,000. Depreciation and amortization expenses will rise by $50,000, interest expense will increase by $150,000, and 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?
A) no change
B) $40,000 increase
C) $60,000 increase
D) $80,000 increase
E) $180,000 increase

Question

Quizplus · Accepted Answer

The net income increase can be calculated as follows: Increase in sales ($1,000,000) minus increase in operating costs ($700,000) minus increase in depreciation and amortization ($50,000) gives a pre-tax profit increase of $250,000. Subtracting the increase in interest expense ($150,000) results in a pre-tax income increase of $100,000. Applying the tax rate of 40% ($100,000 * 40% = $40,000), the after-tax income increase is $60,000 ($100,000 - $40,000).

Dillard Industries Is Expanding Its Operations Throughout the Southeast United