Question 2 Ricardo Entertainment recently reported the following income statement:Sales15,000,000Cost of goods sold7,500,000EBIT7,500,000Interest1,500,000EBT6,000,000Taxes (40%)2,400,000Net income3,600,000The company’s CFO, Fred Mertz, wants to see a 20 percent increase in net income over the next year. Mertz has made the following observations:Ricardo’s operating margin (EBIT/Sales) was 40 percent this past year. Mertz expects that next year this margin will decrease to 35 percent.Ricardo’s interest expense is expected to remain constant.Ricardo’s tax rate is expected at 35% percent.On the basis of these numbers, what is the percentage increase in sales that Ricardo needs in order to meet Mertz’s target for net income?

Solution- 1-Net income = 3600000 ADD increase 360000 * 20% =720000…

Answered: Ricardo Entertainment recently reported…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question 2

Ricardo Entertainment recently reported the following income statement:

Sales	15,000,000
Cost of goods sold	7,500,000
EBIT	7,500,000
Interest	1,500,000
EBT	6,000,000
Taxes (40%)	2,400,000
Net income	3,600,000

The company’s CFO, Fred Mertz, wants to see a 20 percent increase in net income over the next year. Mertz has made the following observations:

Ricardo’s operating margin (EBIT/Sales) was 40 percent this past year. Mertz expects that next year this margin will decrease to 35 percent.
Ricardo’s interest expense is expected to remain constant.
Ricardo’s tax rate is expected at 35% percent.

On the basis of these numbers, what is the percentage increase in sales that Ricardo needs in order to meet Mertz’s target for net income?

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