In November of each year, the CFO of Barker Electronics begins the financial forecasting process to determine the firm's projected needs for new financing during the coming year. Barker is a small electronics manufacturing company located in Moline, Illinois, which is best known as the home of the John Deere Company. The CFO begins the process with the most recent year's 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 firm's income statement for 2015 follows:

The electronics business has been growing rapidly over the past 18 months as the economy recovers, and the CFO estimates that sales will expand by 16 percent in the next year. In addition, he estimates the following relationships between each of the income statement expense items and sales.

Note that for the coming year both depreciation expense and interest expense are projected to remain the same as in 2015.

a. Estimate Barker's net income for 2016 and its addition to retained earnings under the assumption that the firm leaves its dividends paid at the 2015 level.

b. Reevaluate Barker's net income and addition to retained earnings if sales grow at 32 percent over the coming year. However, this scenario requires the addition of new plant and equipment in the amount of $120,000, which increases annual depreciation to $49,000 per year, and interest expense rises to $14,000.

Data table Income Statement Sales 12/31/2015 $ 1,500,000 900,000 $ Cost of goods sold Gross profit Operating costs Depreciation expense Net operating profit Interest expense Earnings before taxes 600,000 150,000 42,000 $ 408,000 9,000 $ 399,000 119,700 Taxes $ 279,300 Net income Dividends Addition to retained earnings $ 20,000 259,300 $ Data table COGS/sales 60% Operating expenses/sales 10% Depreciation expense $ 42,000 Interest expense $9,000 Tax rate 30% (Click on the icon located on the top-right corner of the data table above in order to copy its contents into a spreadsheet.) Print Done