Question

A project has projected values of: unit sales = 1,650, price per unit = $19, variable cost per unit = $7, fixed costs per year = $4,700. The depreciation is $1,100 a year and the tax rate is 34 percent. What effect would a decrease of $1 in the variable cost per unit have on the operating cash flow? A.-$8.58 B. -$1,089 C. -$912 D. $1,089 E. $912

Answer 1

Answer:

Operating cash flow increases by

Correct option is D $1,089

Explanation:

Current operating cash flow

Sales - Costs = $19 X 1,650  = $31,350 - $11,550 - $4,700 -$1,100 = 14,000

Now less: taxes = $14,000 X 34% = $4,760

Net of taxes income = $14,000 - $4,760 = $9,240

This is operating profit

Operating cash flow = Operating profit + Depreciation = $9,240 + $1,100 = $10,340

In case variable cost is decreased by $1 per unit then

Sales - Costs = $19 X 1,650  = $31,350 - $9,900 - $4,700 -$1,100 = 15,650

Now Less: Taxes = $15,650 X 34% = $5,321

Income net of taxes = $15,650 - $5,321 = $10,329

This is operating profit

Operating cash flow = Operating profit + Depreciation = $10,329 + $1,100 = $11,429

Change in operating cash flow = $11,429 - $10,340 = $1,089

Since this value is $1,089 positive correct option is D