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 2018 is shown. (in $000):

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 20 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 2018.

a. Estimate Barker’s net income for 2019 and its addition to retained earnings under the assumption that the firm leaves its dividends paid at the 2018 level.

b. Recalculate Barker’s net income and addition to retained earnings if sales grow at 40 percent over the coming year. However, this scenario requires the addition of new plant and equipment in the amount of $100,000, which increases annual depreciation to $58,000 per year, and interest expense rises to $15,000.

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Income Statement ($000) YEAR ENDED DECEMBER 31, 2018 Sales $ 1,500 Cost of goods sold (1,050) Gross profit $ 450 Operating costs (225) Depreciation expense (50) Net operating profit $ 175 Interest expense (10) Earnings before taxes $ 165 Taxes (58) Net income $ 107 Dividends 2$ 20 Addition to retained earnings 2$ 87 COGS/sales 70% Operating expenses/sales Depreciation expense ($000) Interest expense ($000) 15% $50 $10 Tax rate 35%