Taravella Industries reported net income of $75 million in 2004. The company's corporate tax rate was 40 percent and its interest expense was $25 million. The company had $500 million in sales and its cost of goods sold was $350 million. Taravella's goal is for its net income to increase by 20 percent (to $90 million) in 2005. It forecasts that the tax rate will remain at 40 percent, interest expense will increase by 40 percent, and cost of goods sold will remain at 70 percent of sales. What level of sales (to the closest million) will Taravella have to produce in 2005 in order to meet its goal for net income?

Question

Quizplus · Accepted Answer

To meet its net income goal of $90 million in 2005, Taravella needs to account for the increase in interest expense and maintain its cost of goods sold at 70% of sales. The interest expense in 2005 will be $25 million * 1.4 = $35 million. The net income before taxes and interest (EBIT) needs to be $90 million / (1 - 0.4) + $35 million = $185 million. Assuming cost of goods sold remains at 70% of sales, the gross profit needs to be $185 million / (1 - 0.7) = $616.67 million, rounding up to $617 million in sales to meet the net income goal.

Taravella Industries Reported Net Income of $75 Million in 2004