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Swann Systems is forecasting the following income statement for the upcoming year:
Sales $5,000,000
Operating costs (excluding depreciation) 3,000,000
Gross margin $2,000,000
Depreciation 500,000
EBIT $1,500,000
Interest 500,000
EBT $1,000,000
Taxes (40%) 400,000
Net income $ 600,000
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?
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