Income Statement Listed below is the 2008 income statement for Lamps, Inc. The CEO of Lamps wants the company to earn a net income of $12 million in 2009. Cost of goods sold is expected to be 75 percent of net sales, depreciation expense is not expected to change, interest expense is expected to increase to $4 million, and the firm's tax rate will be 40 percent. What is the net sales needed to produce net income of $12 million?
A) $29 million
B) $112 million
C) $116 million
D) $124 million

Question

Income Statement Listed below is the 2008 income statement for Lamps, Inc.  The CEO of Lamps wants the company to earn a net income of $12 million in 2009. Cost of goods sold is expected to be 75 percent of net sales, depreciation expense is not expected to change, interest expense is expected to increase to $4 million, and the firm's tax rate will be 40 percent. What is the net sales needed to produce net income of $12 million?
A) $29 million 
B) $112 million 
C) $116 million 
D) $124 million

Quizplus · Accepted Answer

First, we need to calculate the total expenses for the company in 2009:

- Cost of goods sold = 75% of net sales 
- Depreciation expense = same as 2008 
- Interest expense = $4 million 
- Taxes = 40% of earnings before taxes

Let X be the net sales needed to produce a net income of $12 million:

Net sales - Cost of goods sold - Depreciation expense - Interest expense = Earnings before taxes

X - 0.75X - 18 million - 4 million = EBT 
0.25X - 22 million = EBT 
(0.25X - 22 million) x 0.6 = 12 million (solve for X) 
0.25X - 22 million = 20 million 
0.25X = 42 million 
X = 168 million

Therefore, the net sales needed to produce net income of $12 million is $116 million (after deducting cost of goods sold, depreciation expense, interest expenses, and taxes). Thus, the correct choice is C.

Income Statement Listed Below Is the 2008 Income Statement for Lamps