FORECASTING NET INCOME

In November of each year the CFO of BArker Electronics begins the financial forecasting process to determine the firms projected needs for new financing during the coming year. Barker is a small electronics manufacturing compay and is know as the home of John Deere. The CFO begins the process with the most recent years income statement, projects sales growth for the coming year, and then estimates net income and finally the additional earnings he can expect to retain and reinvest in the firm. The firms income statement for 2010 is below.

Sales $1,500,000

Cost of Goods Sold - $900,000

Gross Profit - $600,000

Operating Costs - $150,000

Depreciation Expense - $42,000

Net Operating profit - $408,000

Interest Expense - $8,000

Earnings before Taxes - $400,000

Taxes - $128,000

Net Income - $272,000

Dividends - $20,000

Addition to retained earnings $252,000

The electronics business has been growing rapidly over the past 19 months as the economy recovers, and the CFO estimates that sales will expand by 18% in the next year. In addition, he estimates the following relationships between each of the income statement expense items and sales.

COGS/sales 60%

Operatin Expenses/sales 10%

Depreciation Expense -42,000

Interest Expense -8,000

Tax Rate 32%

Note that for the coming year both depreciation expense and interest expense are projected ro remain the same in 2010.

A-ESTIMATE BARKERS NET INCOME FOR 2011 AND ITS ADDITON TO RETAINED EARNINGS UNDER THE ASSUMPTION THAT THE FIRM LEAVES ITS DIVIDENDS PAID AT THE 2010 LEVEL. WHAT IS THE ESTIMATE OF ARKERS NET INCOME IN 2011? ROUND TO THE NEAREST DOLLAR.

B-ASSUMING THE FIRM LEAVES ITS DIVIDENDS PAID AT THE 2010 LEVEL, WHAT IS THE ESTIMATE OF BARKERS ADDITION TO RETAINED EARNINGS FOR 2011? ROUND TO THE NEAREST DOLLAR.

C-IF SALES GROW AT 36% OVER THE COMING YEAR, ANNUAL DEPRECIATION INCREASES TO $ -50,000 PER YEAR, AND INTEREST EXPENSE RISES TO $ -12,000, WHAT IS THE ESTIMATE OF baRKERS NET INCOME FOR 2011? ROUND TO THE NEAREST DOLLAR.

D-ASSUMING THE FIRM LEAVES ITS DIVIDENDS PAID AT THE 2010 LEVEL, WHAT IS THE ESTIMATE OF BARKERS ADDITION TO RETAINED EARNINGS FOR 2011? ROUND TO THE NEAREST DOLLAR