Question
Consider a four-year project with the following information: Initial fixed asset investment = $380,000; straight-line depreciation to zero over the four-year life; zero salvage value; price = $54; variable costs = $42; fixed costs = $185,000; quantity sold = 90,000 units; tax rate = 34 percent.
How sensitive is OCF to changes in quantity sold? (Do not include the dollar sign ($). Round your answer to 2 decimal places. (e.g., 32.16))
OCF will by $ for every additional unit sold.
Required:
How sensitive is OCF to changes in quantity sold? (Do not include the dollar sign ($). Round your answer to 2 decimal places. (e.g., 32.16))
Explanation / Answer
PLEASE RATE ME FIRST ANSWER IS CORRECT FOR SURE
Calculation Of OCF (Operating Cash Flow) Income Statement Amount Sales (90,000 units @ $54/unit) $ 4,860,000 Less:- Variable Cost (90,000 @ 42) $ (3,780,000) Contribution (sales - VC) - (I) $ 1,080,000 Less :- Fixed Cost Depreciation (See Notes Below) $ (95,000) Other Fixed Cost $ (185,000) Total Fixed Cost (II) $ (280,000) Earnings Before tax (I) - (II) $ 800,000 Less:- Tax @ 34% $ (272,000) Earnings after tax $ 528,000 Operating Cash flow (OCF) Earnings before tax + Dep - Tax (800,000+95,000-272,000) $ 623,000 Now to calculate the Senstivity of OCF to quantity sold, we will calculate the OCF at different quantity e.g 100,000 Income Statement Amount Sales (100,000 units @ $54/unit) $ 5,400,000 Less:- Variable Cost (100,000 @ 42) $ (4,200,000) Contribution (sales - VC) - (I) $ 1,200,000 Less :- Fixed Cost Depreciation $ (95,000) Other Fixed Cost $ (185,000) Total Fixed Cost (II) $ (280,000) Earnings Before tax (I) - (II) $ 920,000 Less:- Tax @ 34% $ (312,800) Earnings after tax $ 607,200 Operating Cash flow (OCF) Earnings before tax + Dep - Tax (920,000+95,000-312,800) $ 702,200 So, the Change in OCF for every unit change in sales is:- Change in OCF/ Change in Sales Unit (702,200 - 623,000) $ 79,200 $ 7.92 (100,000-90,000) 10,000 Therefore for every change in Unit of Sales OCF will increase or Decrease by $7.92 For Example, If sales decrease by 500 units, then OCF will reduce to 500*7.92 = $3,960 Notes:- Calculation of Depreciation Straight Line method Cost - Salvage value (380,000-0) $ 95,000 Useful life 4
