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…

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter3: Cost-volume-profit Analysis

Section: Chapter Questions

Problem 20MC: Wallace Industries has total contribution margin of $58,560 and net income of $24,400 for the month...

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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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