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(Forecasting net income)

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:

Income Statement

Sales

$1,500,000

Cost of goods sold

900,000

Gross profit

$600,000

Operating costs

180,000

Depreciation expense

40,000

Net operating profit

$380,000

Interest expense

12,000

Earnings before taxes

$368,000

Taxes

110,400

Net income

$257,600

Dividends

$28,000

Addition to retained earnings

$229,600

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

22 percent in the next year. In addition, he estimates the following relationships between each of the income statement expense items and sales:

COGS/sales;60% Operating expenses/sales;12% Depreciation expense ;$40,000 Interest expense ;$12,000 Tax rate;30%

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 44 percent over the coming year. However, this scenario requires the addition of new plant and equipment in the amount of $80,000, which increases annual depreciation to $46,000 per year, and interest expense rises to $16,000.

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