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Garfield Industries is expanding its operations throughout the Southeast United States. Garfield anticipates that the expansion will increase sales by $1,000,000, and increase the costs of goods sold by $700,000. Depreciation expenses will rise by $50,000 and interest expense will increase by $150,000. The company’s tax rate will remain at 40 percent. If the company’s forecast is correct, how much will net income increase or decrease, as a result of the expansion?

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pedrocarratore

Answer:

$60,000 increase

Explanation:

The company's additional earnings before interest and taxes (EBIT) are subjected to a 40% tax rate. The company's EBIT is:

[tex]EBIT = Sales - Cost+Depreciation\\EBIT = 1,000,000-700,000+50,000\\EBIT =\$350,000[/tex]

The change in income is determined as the EBIT minus taxes and interest expense:

[tex]I = \$350,000*(1-0.4) -\$150,000\\I=\$60,000[/tex]

Therefore, Garfield Industries experienced a $60,000 increase in its income  as a result of the expansion.

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